We chose to not change our assumption based on one month’s data. The risk is now more skewed to the possibility of another 75bps hike in September. July nonfarm payroll report that showed a gain of 528,000 jobs, which was more than twice expectations of roughly a gain of 250,000 jobs, might make this assumption more questionable.
In last week’s commentary, we stated that “we do not anticipate any more hikes as large as 75 bps for the duration of this cycle.” Friday’s BLS release of the U.S. Although we did not anticipate that the Fed will cut interest rates in the foreseeable future, we did project that the Fed could slow the rate of further interest rate hikes.
We also surmised that most of the potential “bad” news was reflected in selective tech and growth stocks. We postulated that in a slowing economy, that selected growth stocks should trade at a “premium” valuation since growth in a slowing economy would be more difficult to ascertain. economic growth that could help rein in U.S. We supposed that long duration stocks such as high tech and other growth stocks could have over-discounted the negative effects of higher real interest rates in their valuations. This was an important piece of our analysis. The 10-year Treasury yield had just surged to a peak just under 3.5% on June 14. The key was that we maintained an open mind as to which stocks and/or sectors to recommend for long-term investors at the most opportune time. It would not be surprising to see a slowdown in business investment.Ī delineation of our recommending certain high quality tech stocks and growth stocks on June 16 might be helpful as an example of why having a “cold heart” in making investment decisions should always be the preferred investment posture, in our opinion. The Conference Board’s latest CEO confidence survey already indicates that CEO confidence has fallen to levels compatible with a recession. According to Goldman Sachs on August 1, “wage growth needs to slow from the current 5.5% pace to about 3.5% to be compatible with FOMC’s 2% target for inflation.” Goldman forecasts wage growth slowing to 4.6% by year end and under 4% by the end of 2023. Many managements noted easing labor shortages and tentative signs of peaking wage growth. Much of corporate managements’ remarks on Q2 earnings conference calls mirrored our assessments of a slowing economy as suggested by most PMI surveys. The Upshot: Our general investment approach remains the same as depicted in last week’s commentary. This is the first major central bank we are aware of that explicitly is raising rates aggressively into a projected recession. It reiterated its commitment to a 2% target for UK inflation even as it projected that the UK will enter a recession in Q4 2022 that will persist through a total of five quarters. It increased its assumption of peak inflation in October to 13.3% year-over-year (y/y). As expected, the Bank of England raised its key policy interest rate by 50 basis points (bps) this week.We will continue to analyze data with a “cold heart.” This could also be an example of why we need to see more than one month’s data before we change our opinion. We will monitor closely the future trend of this survey. The composition of this particular PMI might account for its very positive depiction of the U.S. The principal outlier to this narrative was the ISM services July PMI for the U.S. With the exception of China, most major Purchasing Managers’ Indexes (PMIs) suggest weakening economic trends, and softening of inflationary and wage pressures.banks tightening certain lending standards – especially with respect to certain business loans.
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