Amid extremely volatile markets, 41-year high inflation and investors increasingly worried about a potential recession, July 6 brought a slew of economic data, which underscored that while nothing that came out was a surprise, fears about a slowdown in the second half of the year, are felt across the board.
The Federal Reserve released the minutes of its June 14-15 Federal Open Market Committee (FOMC) meeting, noting that “many participants raised the concern that longer-run inflation expectations could be beginning to drift up to levels inconsistent with the 2% objective. These participants noted that, if inflation expectations were to become unanchored, it would be more costly to bring inflation back down to the Committee’s objective.”
Participants judged that an increase of 50 or 75 basis points would likely be appropriate at the next meeting, according to the minutes.
Rusty Vanneman, chief investment strategist at Orion Advisor Solutions, told GOBankingRates that the minutes from the Fed’s June meeting didn’t warrant any surprise.
“Inflation is still raging, GDP for the second quarter of 2022 is anticipated to be negative, and the stock market has yet to hold against any of 2022’s headwinds. Our focus will continue to lie on future CPI and labor market readings as we move into the back half of the year. As for further rate hikes, Fed minutes lay out another 50 to 75 basis points in July, but nothing is outside the bounds of what the market is pricing in for the remainder of the year,” Vanneman added.
The minutes also show that participants recognized the possibility that an even more restrictive stance could be appropriate if elevated inflation pressures were to persist.
Jeffrey Rosenkranz, portfolio manager, Shelton Capital Management, told GOBankingRates that the minutes continue to underscore the message that Fed officials “are terrified of inflation becoming entrenched, and rightfully so.”
“Once expectations become more permanent, they are even harder to unwind. Fed officials understand that their aggressive but necessary stance brings downside risk to the economy, acknowledging the recession risk that the market has already priced in,” Rosenkranz said. “Bottom line is that short-term rates need to push higher and financial conditions need to remain tight to prevent entrenched expectations, and the Fed understands this will crash the economy and is prepared to clean up the mess with a pause and eventual rate cuts.”
On June 16, as expected, the Federal Reserve said it would raise interest rates by three-quarters of a percentage point rate, the first time it has done so since 1994. The move was widely anticipated and comes amid a market that has entered bear territory and inflation at a 41-year high.
Louis Ricci, Head Trader for Emles Advisors, told GOBankingRates that while “plenty of people are expecting restrictive policy to combat inflation, but 50bps may be a dovish move.”
“There were no surprises in these minutes. Attention is focused on the payroll print this Friday. If the print is strong, it gives them cover to be more aggressive with the policy rate, if weak, expect to get a more dovish response,” Ricci added.
Mortgage Applications and Rates
Mortgage rates decreased for the second consecutive week, but with fears of an economic slowdown, mortgage applications decreased as well — 5.4% from one week earlier — according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 1, 2022.
“Mortgage rates decreased for the second week in a row, as growing concerns over an economic slowdown and increased recessionary risks kept Treasury yields lower,” Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting said in a press release. “Mortgage rates have increased sharply thus far in 2022 but have fallen 24 basis points over the past two weeks, with the 30-year fixed-rate at 5.74%.”
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances -$647,200 or less- decreased to 5.74% from 5.84%, according to the MBA survey.
Meanwhile, the average contract interest rate for 30-year fixed-rate mortgages with jumbo loan balances — greater than $647,200 — decreased to 5.28% from 5.42%.
“Rates are still significantly higher than they were a year ago, which is why applications for home purchases and refinances remain depressed. Purchase activity is hamstrung by ongoing affordability challenges and low inventory, and homeowners still have reduced incentive to apply for a refinance,” Kan added in the release.
The number of job openings slightly decreased in May to 11.3 million, according to the U.S. Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) report on July 6. This follows April’s revised 11.6 million job openings.
Meanwhile, the number of Americans who quit their jobs remained almost unchanged at 4.3 million, or 2.8%. Data shows that quits decreased in real estate and rental and leasing (-33,000) and in state and local government education (-19,000). On the other hand, quits increased in arts, entertainment, and recreation (+19,000).
Jeanniey Walden, CMO of DailyPay, told GOBankingRates that “Chairman Powell has publicly stated that narrowing the supply-demand gap in the labor market is the key to lowering inflation while avoiding a recession. By that measure, this morning’s JOLTS report is a step in the right direction with job openings declining 4% to 11.3 million in May, taking some momentum out of the wage-price spiral.”
She added that after two years of rehiring, employers are turning their attention to getting the most out of their existing workforces. And with labor productivity down in the first quarter by the most in 75 years, the alarm bells are ringing.
“That’s why we’re seeing forward-looking companies beginning to deploy new technology solutions like real-time bonuses to incentivize employees and enhance productivity while providing streaming pay to curb the impact of inflation. Finally, something employers and employees can agree upon,” she added.
The largest decreases in job openings were in professional and business services (-325,000), durable goods manufacturing (-138,000), and nondurable goods manufacturing (-70,000), the data showed.
For the month of June, Purchasing Managers Index (PMI) data showed an increase in business activity across five out of seven U.S. sectors, according to the S&P PMI S&P Global US Sector PMI released July 6.
The financial sector saw its worst performance since May 2020, and healthcare suffered as well.
On the other hand, consumer services was the best-performing broad category in June, boosted by strong demand for travel, leisure and hospitality, the data shows.
Technology was also an outperforming category in June.
The consumer goods sector hit a four-month low in June, due to stretched household finances and weaker spending on discretionary items, according to S&P.
“Demand for goods and services from households is showing signs of moderating substantially due to the rising cost of living. Meanwhile, tighter financial conditions are starting to hit, and it was notable that the service sector slowdown was led by a steep drop in financial services activity,” Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said in the report.
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