Markets declined last week with more downgrade warnings and Fed minutes.
Positive economic data along with Fed minutes that showed members are still worried about inflation caused investors to get nervous about high interest rates for longer than expected. Early last week, Retail Sales came in stronger than expected—+0.7% for July and +3.2% year-over-year. That was followed up by strong 2nd quarter earnings from big box retailers such as Home Depot, Target, and Walmart. Proof that the consumer is alive and well wasn’t cheered by the market due to continued concerns about inflation. Those fears are somewhat unfounded as consumers have seen the “staples” portion of inflation—utilities, gas, food at home, and electricity—decline 10% year-over-year. Fed Futures continue to show a 90% probability of no rate hike in September.
Data from the Fed shows that financial conditions are not currently flashing recession signals.
The Chicago Fed's National Financial Conditions Index and the St. Louis Fed's Financial Stress Index both show loose/stable conditions. The Atlanta Fed also increased their projections for 3rd quarter GDP last week from +5.0% to +5.8%. This week investors will be parsing the words of several Fed speakers, most especially those of Fed Chairman Powell on Friday at the annual Jackson Hole, WY Economic Policy Symposium. Given recent downgrades and warnings on banks by the likes of Fitch and Moody’s, comments this week during the Jackson Hole event will be closely watched for some reassurance that financial conditions remain stable.
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