Weekly Market Pulse - Week ending August 12, 2022

Market developments

Equities: Equities saw a strong rally after U.S. July inflation data was released mid-week, which was below estimated and showed inflation slowing. Investor sentiment was bolstered by the possibility that the Federal Reserve may be more dovish than previously anticipated.

Fixed income: Yields remained relatively unchanged but were volatile over the week. U.S. high yield spreads continued their trend of strong tightening.

Commodities: Oil rallied after the International Energy Agency raised its demand forecast. Copper rallied alongside the peaking inflation narrative and a more favourable assessment of the outlook for global growth. 

Performance (price return)

  As of August 12, 2022

Canada – No notable releases

No notable releases for the week.

U.S. – CPI releases flat; PPI falls; University of Michigan consumer sentiment improves

U.S. CPI was lower than expected and remained flat for the month of July. CPI readings were 8.5% year-over-year and 0.0% month-over-month. The price of gasoline has fallen by 7.7% but the decrease was offset by a 1.1% increase in the cost of food and a monthly increase of 0.5% in shelter costs. This CPI release was good news for the Fed and equity markets, because it signaled that inflation may have peaked in the short term.

The U.S. Producer Price Index followed a similar trajectory to CPI, falling below consensus estimates. PPI had a reading of 9.8% year-over-year and -0.5% month-over-month. The price of final demand goods fell by 1.8%, whereas the price of final demand services increased by 0.1% month-over-month. The decrease in the price of goods is attributed to a 9.0% month-over-month decrease in energy prices. This was offset by a 1.0% month-over-month increase in food prices.

The University of Michigan’s preliminary release of their August consumer sentiment survey released with a surprise on the upside. Consumer sentiment had a reading of 55.1–up from 51.5, and consumer expectations had a reading of 54.9–up from 47.3. Both sentiment and expectations had tailwinds from declining energy costs, leading consumers to lower their 2023 inflation expectations (median) to 5.0%. However, inflation is still the elephant in the room and 48% of consumers blame inflation for reducing their quality of life.

International – China’s CPI rises but PPI falls; U.K. GDP falls; U.K. industrial and manufacturing production falls; Eurozone industrial production rises

China’s CPI data release for July came in below expectations. Consensus estimates were 2.9% year-over-year and 0.5% month-over-month. The actual CPI figures were 2.7% year-over-year and 0.5% month-over-month. The primary driver of Chinese inflation was food prices, which rose 6.3% year-over-year. The price of pork demonstrated a sharp increase of 20.2% year-over-year. Food prices surged due to ongoing demand momentum from June amid tighter supplies.

China’s July PPI release shared a similar narrative with their CPI. PPI came in weaker than expected with a value of 4.2%, down from 6.1% year-over-year in June’s release. Energy and metal prices have fallen during the month of July as a recessionary narrative was popularized in the U.S. This alleviated cost pressures many Chinese producers were facing.

The U.K.’s second quarter GDP estimates released with a surprise on the upside. GDP was estimated to have contracted by 0.1% quarter-over-quarter. The year-over-year figure showed an expansion of 2.9%. Government consumption fell for a second consecutive quarter by 2.9%. Household consumption has also fallen by 0.2% quarter-over-quarter, mainly due to high inflation tightening household budgets.

U.K. industrial and manufacturing production released above expectations for the month of June. Industrial production had a contraction of 0.9% and manufacturing production had a contraction of 1.6% month-over-month. The fall in industrial production is attributed to the manufacturing decrease and a 1.8% month-over-month decrease in mining/quarrying. The fall in manufacturing production was broad based and only 3 of 13 sectors positively contributed to the statistic. This is due to increasing price pressures from energy and material costs.

Eurozone’s industrial production remained stronger than expected throughout June. Industrial production expanded by 0.7% month-over-month. May’s reading was revised higher to 2.1% month-over-month. The positive drivers of growth was a 2.1% increase in the production of capital goods and a 0.6% month-over-month increase in the production of energy. This was offset by a 2.3% decrease in non-durable goods, 1.1% decrease in durable goods and 0.3% month-over-month decrease in intermediate goods.