Federal Reserve Bank Chairman Jerome Powell set investors straight at the Fed's annual Jackson Hole symposium. He said the job of lowering inflation is not done, and that the Fed will continue to raise interest rates in order to slow the economy.
"We must keep at it until the job is done," Powell said, during his speech.
That was enough to send stocks lower after a few days of gains. At the same time, the U.S. dollar fell, as did interest rate yields, which is somewhat counter intuitive given Powell's hawkish statement. The inflation data released on Friday morning showed a little progress on the fight against inflation. The Personal Consumption Expenditure Price Index, (PCE), a closely watched indicator, eased to 4.7 percent, slightly below forecasts of 4.8 percent.
Month-over-month, the PCE index increased by 0.2 percent in April, which was much lower than the 0.9 percent rise in March 2022. Lower inflation in investors' minds means the Fed does not need to tighten monetary policy as much. That would translate into less downward pressure on the economy and better corporate earnings. Powell said we are not at that stage quite yet.
On the economic front, the data continues to conflict. U.S. second quarter GDP was revised upward this week from minus-0.08 percent to minus-0.06 percent. As readers may know, Gross Domestic Product measures the value of goods and services. Another data point the Fed follows closely is a subset of GDP called Global Domestic Income (GDI). GDI measures the progress of labor income. That number gained plus-1.4 percent in the second quarter of 2022.
Most economists tend to average these two variables together in order to get a better picture on how the economy is really fairing. If we do that, GDP in the first quarter 2022 would have been a gain of plus-0.1 percent and a positive 0.4 percent in the second quarter, instead of two negative quarters in a row, according to headline GDP. Granted, both quarters would still be below the long-term trend of GDP, but not quite recessionary just yet.
However, rising interest rates are impacting economic growth. The latest Job Openings and Labor Turnover Survey (JOLTS) report, for example, showed that job openings have fallen by 1.1 million between March and June 2022.
Indexes based on online job listings, compiled by two job search engines, Indeed and LinkUp, suggest that the trend in job openings continued to decline in July and August. Other economic data that shows a decline is pending home sales, that are now down 22.5 percent, versus last year, and durable goods orders are flat to down. That data should encourage the Fed in their efforts to slow the growth in the economy.
The gains in the market this past week were expected. Stocks lost 2.4 percent in three days and then bounced. Gains pushed the S&P 500 Index up to the 4,200 level before rolling over. The way things are set up right now, we should see the market bounce up somewhat for a day or so next week, but I expect a series of lower lows by the end of next week. The bounces we get will disappoint and fail to make higher highs. That is my best case. If things get out of hand, we could just continue to drop down to 3,900 on the S&P 500 Index. In any case, my playbook for September into October 2022 is down.
Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at firstname.lastname@example.org.
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