Market Update: July 22, 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 S&P 500 had a good week this week. The support line mentioned in last weeks video actually held up as the market continued to make higher highs over the last few days. Since hitting that -24% bottom in June, the market is now up 9%.

In the news this week, Russia turned their Nord Stream pipeline back on to supply natural gas to Europe. The European Central Bank increased interest rates for the first time in a long time to combat inflation. And jobless claims increased this month, the first sign of a cooling labor market.

On the inflation front, flexible CPI did pullback slightly this month. However, that follows a very large spike since 2020. More importantly, sticky CPI continues to climb. As a reminder, sticky CPI is more predictive of sustained inflation that flexible CPI so continued momentum from sticky CPI is indicative of persistent inflation. There is reason to believe that inflation might start to abate, however. Here are a few examples of commodity input prices that have fallen over recent weeks.

First and foremost, crude oil prices have fallen about $20 since the peak in June. As the most important input price that affects just about every industry in the economy, falling oil prices are a welcome sign.

Wheat prices have fallen significantly since May. Wheat is the primary commodity produced in Ukraine. Thus, when the ware with Russia began, wheat supplies were constricted causing rising prices for a number of months. However, prices have fallen as the supply/demand rebalanced beginning in May.

The primary input for industrial production is copper. Typically, when industrial production is surging, copper prices also tend to surge. The reverse is also true. When global demand falls, like we’ve seen out of China in recent months, then copper prices tend to fall in tandem.

Even cotton prices have fallen over the last few weeks. Since each of these commodities are the first input in the production supply chain, falling demand for the end product like a pair of jeans or a loaf of bread cause upstream falling prices of the input commodities.

All told, falling commodity prices are a sign of abating inflation data even if we haven’t seen CPI fall yet. Thus, indicators like the 5 year forward inflation rate have been pulling back indicating that inflation over the next 5 years should pull back to normal levels.

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Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved July 22, 2022, from FactSet Database.

2.Federal Reserve Bank of Atlanta. “Inflation project: Stick-Price CPI.” Updated July 13, 2022. Retrieved from https://www.atlantafed.org/research/inflationproject/stickyprice

3.FactSet Research Systems. (n.d.). WTI Crude Oil Spot Prices (Interactive Charts). Retrieved July 21, 2022, from FactSet Database.

4.FactSet Research Systems. (n.d.). Portland Hard Wheat Spot Prices (Interactive Charts). Retrieved July 21, 2022, from FactSet Database.

5.FactSet Research Systems. (n.d.). Copper NYM Spot Prices (Interactive Charts). Retrieved July 21, 2022, from FactSet Database.

6.FactSet Research Systems. (n.d.). Cotton NYF Near Term Spot Prices (Interactive Charts). Retrieved July 21, 2022, from FactSet Database.

7.Federal Reserve Bank of St. Louis, 5-Year, 5-Year Forward Inflation Expectation Rate [T5YIFR], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/T5YIFR, July 21, 2022.

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