AE Wealth Management: Weekly Market Insights | 7/23/23 – 7/29/23

Weekly Market Commentary

THE WEEK IN REVIEW: July 23 – July 29, 2023

Another Fed meeting, another rate hike

As anticipated, the Federal Reserve increased interest rates by another 25 basis points during last week’s meeting, taking the Fed Funds rate to 5.25-5.50% (the highest level since 2001).

In his post-meeting remarks, Fed Chair Jerome Powell left the door open for additional hikes in 2023 and indicated that rate cuts aren’t on the table for this year — at least, not yet. Powell acknowledged that “restrictive” monetary policy was now “putting downward pressure on economic growth and inflation” but said the Fed would be watching the data to make future decisions.

Data released late last week seemed to back up Powell’s statements. The first reading of second-quarter gross domestic product (GDP) was released just after the Fed’s meeting. The U.S. economy grew by 2.4% in the second quarter, up from 2.0% in the first quarter and above expectations of 1.8%. Meanwhile, durable goods orders jumped 4.7% in June.

The data reveals we are nowhere near a recession, and the economy is accelerating instead of decelerating as expected. Even Powell noted in his remarks that the Fed’s staff is no longer forecasting a recession. As a result, the Fed sees room to raise rates to keep fighting inflation. Markets didn’t like this idea, and volatility rose mid-week in response.

However, markets calmed following positive inflation news on Friday. Personal consumption expenditures (PCE) — the Fed’s preferred measure of inflation — showed a year-over-year increase of 4.1% for June, the slowest increase since September 2021. And the employment cost index, which indicates wage inflation, rose 1% in the second quarter for its smallest increase in two years.

All of the numbers indicate inflation is dropping, and now we have nearly two full months for rates to keep battling inflation before the Fed meets again. The data, plus Powell’s comments, are raising anticipation that the Fed is done raising rates for now, and the optimism continues to fuel the summer rally as we head into August.

Coming This Week

• This week’s data will be mostly about employment. Job openings for June will be released on Tuesday. (They were previously at 9.8 million in May.) ADP employment numbers for July are scheduled for Wednesday; after June’s unexpectedly robust addition of 497,000 jobs, the forecast is calling for a much smaller 173,000. July nonfarm payrolls will round out the employment news on Friday.
• Other data will be light. We’ll see ISM manufacturing and construction spending on Tuesday, factory orders on Thursday and hourly wage information on Friday.

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