Hi, and welcome to PIGM’s Weekly Market Commentary for Monday, July 18, 2022. I'm Rich Tavis from the Strategic Investment Research Group or SIRG. SIRG is part of PIGM, the asset management division of Prudential Financial. 

The big news from last week was the highly anticipated June CPI print, which came in hotter than expected. Not only was the headline number high, rising to 9.1% on a year over year basis, but more importantly from the Fed standpoint, core inflation surprise to the upside with price increases that were fairly broad based. This led to market expectations for a more aggressive path of Fed tightening in the coming months, with markets starting to focus on the potential for 100 basis point increase in July. 

At one point, odds for 100 basis point hike were being priced as high as 80%. However, we had a number of comments from Fed officials late in the week suggesting that while 100 basis points is not off the table, they're leaning towards at least 75 as their base case. 

By Friday close, odds of 100 basis point hike were being priced at around 30%, according to the CME Fed watch tool. We also saw several sell side strategists downgrade their price targets for the S&P 500 as the odds of a soft landing for the US economy look increasingly less likely. 

Not surprisingly, the S&P 500 finished lower for the week down about 90 basis points, despite a rally on Friday. In the bond market, the yield curve inverted further as longer-term treasury yields fell with recession fears, while shorter dated yields increased with rate hike expectations. This led to gains for the broad investment grade bond market as measured by the Bloomberg Aggregate Bond Index. 

In terms of other economic data for the week, the headline Producer Price Index also surprised to the upside in June, while core PPI slowed from May and was a bit softer than expected. Also, the preliminary reading of the University of Michigan Consumer sentiment index improved slightly in July but remain near its all-time low as rising prices continue to squeeze consumers. 

In terms of economic momentum, data was mixed. Retail sales for June increased by 1% on a month over month basis, better than expected but also likely boosted by gasoline sales and rising prices. That being said, it does help alleviate concerns that we're on the brink of, or already in a recession. 

Industrial production, on the other hand fell and was below expectations. It's not entirely clear to what extent weakness reflects a softening of demand versus the impact of supply chain disruptions. For example, the Empire State Manufacturing Index, one of the first regional manufacturing surveys to come out for July, rebounded with the new orders and shipments components both increasing. But supplier delivery times continued to fall, a sign of improving supply chain conditions. Expectations for future business conditions, however, did fall sharply.  

We also saw a second quarter earnings season kick off last week with some of the big banks reporting with mixed results so far. 

Turning overseas, the euro continued to fall, reaching parity with the dollar as worries that this week’s scheduled reopening of a key Russian gas pipeline could be delayed, pushing the region into a recession. Also, China GDP came in at the slowest pace in two years as COVID lockdowns weighed on growth. 

Finally, the Bank of Canada surprised markets by hiking rates by 100 basis points versus expectations for 75 in an effort to prevent inflation expectations from becoming entrenched. 

As we turn our attention to this week, we won't have any commentary from Fed officials who were in the blackout period leading up to the FOMC meeting later this month. In the US, in addition to earnings, the focus will be on the rate sensitive housing market as well as markets preliminary purchasing managers indices for July an early gauge of economic activity which come out on Friday. 

Overseas, investors will remain on edge about whether or not Russia will resume gas flows to the Nord Stream one pipeline. In addition, the European Central Bank is expected to start hiking rates on Thursday. 

Investors are also looking for them to deliver a plan to prevent a sharp rise in the yield spreads of more heavily indebted countries such as Italy as they begin hiking rates. There's also a Bank of Japan policy meeting where the focus is likely to be on their efforts to keep 10-year government bond yields close to 0 in an environment where other central banks are raising rates. 

Finally, we'll get some additional CPI inflation data in the euro area, UK, and Canada. 

That's all for now, but we'll speak again next week.