Market Update: August 12, 2022

Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.

 

The market has had yet another good week this week and is up 13% from the June lows. The latest rally follows announcements on reduced producer prices as well as slowing inflation readings.

In the news this week, supplier inflation as measured by the producer-price index slowed dramatically for July, the latest sign of easing inflation in the economy. OPEC cut its oil demand forecast due to slowed economic growth concerns. And inflation as measured by the CPI fell slightly from 9% to 8.5% year-over-year in July.

So, let’s dive into those CPI results. Here is that 50 basis point drop put into perspective. Yes, disinflation from 9% to 8.5% is great, and better than expected. But we have a long way to go to return to normalcy. Key drivers of the disinflation were falling energy price in blue, falling gasoline prices in purple, and falling natural gas prices in orange. In order to sustain the price drops, these three cyclical goods are key. While the one-month trend is great, a sustained trend in the downward direction is needed for inflation to fully subside.

Interestingly, sticky prices like shelter shown in purple and food shown in blue did not show a significant drop. These two goods typically show a more sustained, steady increase during inflationary times but are much more indicative of the true inflationary nature of the economy. The fact that neither fell is not necessarily a good sign.

Looking at sticky consumer prices shown in orange and flexible consumer prices shown in green, demonstrate this exact issue. Fast moving, cyclical prices in the flexible index show a significant drop, which is great. Flexible CPI prices usually move before sticky CPI prices. However, Sticky CPI didn’t even budge and continues to move higher at a steady, 5%-plus pace. Here’s a look the same indices, only on a month-over-month basis. Flexible CPI dropped over 10% in July. That’s the line chart shown in orange. The good news is, Sticky CPI shown in blue also showed a month over month drop in growth. However, the trend still remains upward and this isn’t even the first time this year that we’ve seen a month over month drop in Flexible CPI.

All told, we really need to see signs of disinflation in order for the Federal Reserve to have a more dovish stance. But based on these readings, specifically with results on sticky CPI, the true end of the inflation story remains unclear.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved August 11, 2022, from FactSet Database.

2.US Bureau of Labor Statistics. Graphics for Economic News Release. “12-month percentage change, Consumer Price Index, selected categories (past 20 years).” Updated August 10, 2022. Retrieved from https://www.bls.gov/cpi/

3.Federal Reserve Bank of Atlanta. “Sticky-Price CPI.” Updated August 10, 2022. Retrieved from https://www.atlantafed.org/research/inflationproject/stickyprice.

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