The boring days of summer
Markets seem to be feeling the jitters of late summer. For example, stocks have oscillated back and forth. The S&P 500 posted a three-week streak of gains before finally pulling back the week ending August 19. Meanwhile, bond yields have tumbled, and some of the biggest moves have come in commodities as Europe’s energy crisis drags on.
With Labor Day on the horizon and the summer heatwaves almost behind us, the mood of investors seems to be looking for the promise of a new season. As the calendar turns, here’s what we learned this summer, as told by the investor fears we hear:
“We are already in a recession.”
Our view: While US growth has “technically” contracted over the past two quarters, the labor market tends to provide a better signal on the state of the economy. And from this point of view, the workers are still on solid ground. The latest jobless claims report actually fell, signaling that there were fewer people applying for jobless benefits than the previous week. Add to that July’s hit jobs report, with 528,000 jobs added to the US economy, and you have a pretty healthy job market ahead of you. The risks of recession are real, but we don’t think we are one yet.
“Okay, but the Fed will cause a recession.”
Our view: It may be, but July’s FOMC meeting minutes revealed that Jerome Powell and the Federal Reserve are well aware of the risk of excessive tightening now that the policy rate is close to ” neutral “. We look forward to seeing how Powell outplays the monetary policy message after Labor Day, given that the recent rally in risk assets has helped undo the overall tightening, which could galvanize a more hawkish stance ahead.
“Inflation will just keep going up.”
Our view: Evidence is mounting that price pressures are peaking. In recent weeks, we have seen a trifecta. Following a recent US CPI report, existing home prices and auto prices are falling at their fastest pace since the pandemic shock. And the price of gasoline fell below $4 nationally for the first time since March. Fed policy is working well.
That said, inflation is still far too high and its impact is everywhere. It even inspired the Biden administration to name its latest spending program the Cut Inflation Act. Whether it’s a misnomer or marketing magic, it remains to be seen whether the law will have a significant impact on reducing inflation.
Rick Barragan is Managing Director, Los Angeles Market Director, for JP Morgan Private Bank.
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