Inflation, recession fears and Q2 earnings: 3 key factors driving markets

On the latest edition of Market Week in Review, Director of Client Investment Strategies, Mark Eibel, and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, discussed some of the key factors behind recent activity in markets. They also chatted about what to expect from the upcoming Jackson Hole, Wyoming, economic symposium, as well as slowing growth in China.

How are markets interpreting the latest U.S. inflation numbers?

Antal-Gilbert kicked off the conversation by noting that the third week of August was a fairly tame one in markets, with U.S. equities mostly alternating between small gains and losses depending on how each day's release of data was viewed. Eibel agreed, stating that recent market performance has largely been shaped by how investors are interpreting inflation numbers, recessionary concerns and second-quarter earnings.

"On the inflation front, investors in the glass-half-full camp can point to the U.S. July consumer price index (CPI) reading of 8.5%, which marked an easing from June's 40-year-high of 9.1%. On the other side of the fence, those in the glass-half-empty camp can point to the fact that an 8.5% annual increase in consumer prices is still awfully high,"; he remarked.

Recent data on growth can also be interpreted as good or bad, Eibel said, with investors who believe the U.S. is in a recession able to point to the first and second quarter GDP (gross domestic product) numbers - both of which were negative - as well as an inverted U.S. Treasury yield curve. On the other hand, the July employment report - which showed that the U.S. added 528,000 nonfarm payrolls last month - helps lend credence to the argument that the country is not in a recession, he noted.

Investor interpretations of U.S. second-quarter earnings reports can likewise alternate between optimistic and pessimistic, Eibel said. "Case-in-point: the market rallied on strong reports from Walmart and Home Depot on 16 August, before slumping the next day following earnings misses by Target and Lowe's," he remarked. Overall, however, year-over-year earnings growth for the second quarter has been pretty good, Eibel said, and the forward guidance issued by many S&P 500 companies hasn't been quite as bad as feared.

All eyes on upcoming Powell speech at Jackson Hole

The conversation shifted to the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming, which will take place 25-27 August. Antal-Gilbert noted that U.S. Federal Reserve (Fed) Chairman Jerome Powell is slated to address attendees on 26 August, and asked Eibel what to expect from the speech.

"In my opinion, Powell's remarks will probably be very consistent with his recent messaging on inflation - in that the Fed's number-one priority is to continue fighting inflation by raising rates. He'll probably provide some examples of how Fed tightening is helping curb price pressures, and may indicate that the central bank could pause the rate-hiking cycle at a certain point," he stated.

Eibel said the bigger question mark will be how Powell's remarks are interpreted by markets. “Every word the Fed chair says will be analysed, and how the market will react is the big unknown," he explained. Eibel said that typically, whenever the Fed does meet, there are two stages of reactions: the instant reaction to Powell's words, and then the next-day reaction, when markets have had a chance to fully process the Fed chair's remarks. This may prove to be the case at the Jackson Hole symposium, he said.

Chinese economic activity slows, UK inflation reaches double-digits

Antal-Gilbert and Eibel wrapped up the segment with a look at key issues in other markets, including the Asia-Pacific region and Europe. Eibel said July's slowdown in economic activity in China dominated headlines the week of 15 August, noting that some estimates for Chinese growth this year have been lowered to 3%. “It was surprising enough when, earlier in the year, some economists were projecting a growth rate of just 4% in China, which was unheard of after years of growth around 6% to 8%," he remarked.

Meanwhile, in Europe, high inflation commanded the market's attention once more, Eibel said, with UK inflation soaring to 10.1% on a year-over-year basis in July. The lofty increase in consumer prices was the largest since 1982, he noted, and topped consensus expectations for an increase of 9.8%. UK inflation was impacted by rising food and energy prices, Eibel said, with the Russia-Ukraine war in particular helping to drive up energy costs.

Watch the video Listen to the podcast

Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.