Skip to main content
Market Update

Inflation battle drudges while consumer sentiment drops to record lows

Date:
June 27, 2022
  • Joe Rock headshot

    Authors

    Joseph Rock

    Associate
    Treasury Advisory

    Corporates | Denver, CO

Summary

Global stock indices fell last week amid persisting inflation fears and subsequent expectations for more aggressive rate hikes. Domestically, fears that the Fed’s attempts to curb inflation will push the U.S. economy into a recession exacerbated investor concerns. Markets temporarily rebounded in response to the Fed’s mid-week announcement but quickly regressed, as apprehension about the direction of the market environment pushed investors away from stocks and towards U.S. Treasuries. In commodity markets, energy price levels continue to climb, placing more upward pressure on inflation.

Corroding consumer confidence

Morale is low. Consumer sentiment reached all-time lows, as measured by the University of Michigan. The measure has declined 41.5% since last June, reaching figures not comparable since 1980. Recession fears entered the forefront of consumer concerns. Per Google Trends, over the last 12 months, “recession” search entries recently peaked during the middle of the month and increased five-fold since May’s end. Recent indicators have not made the grass greener. Against expectations of a 0.1% increase, retail sales dropped 0.3% in May, the first decline since 2021. One of the market’s favorite recessionary indicators, an inversion of the 2-year and 10-year treasury curve, also revealed itself, albeit briefly, this month. Taking the 2-year’s place, the 5-year treasury briefly surpassed the 10-year rate last week. The volatility of the treasury market has been a growing driver for more aggressive rate hikes. These factors, amongst many more, have prompted the Atlanta Fed to drop second-quarter GDP estimates to 0% from +0.9%. If 0% proves too optimistic, the U.S. economy will officially meet the technical definition for a recession — two consecutive negative quarters of negative GDP. First-quarter GDP had declined 1.5%. Fed Chair Powell remarked on the realities of facing a recession last week. “It’s certainly a possibility,” he said. “It’s not our intended outcome at all, but it’s certainly a possibility, and frankly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market.”

(Related insight: Register for the webinar, "Semiannual Market Update for Corporations")

Combating inflation

Inflation remains public enemy number one. This comes to no surprise to consumers as they’ve battled the highest gas and food prices in recent memory — gas prices rose 4.1% and food climbed 1.2% through the month. As for the Fed, the target has not been clearer and the challenge more difficult. "Fed rate hikes won't bring down gas or food prices,” Powell said last Wednesday. A lack of “precision tools” was noted and the realization of missed judgment from supply-side and COVID-19 difficulties eluded earlier action to fight inflation. Yet, Powell repeated that because of the strong labor market, the economy should be positioned to handle aggressive tightening. Job losses are possible though. Fed officials expect the national unemployment rate to rise to 3.9% by the end of 2023 and 4.1% by 2024’s end. Several analysts predict higher unemployment figures with stagflation as a worst-case scenario. Nevertheless, the Fed indicated that if supply-side problems are worked out, a soft landing could be possible. Time will tell how inflation cools down. Central banks across the globe are taking different approaches and one solution will surely not fit all. "The main thing is we can't fail on this. We really have to get inflation down to 2%," Powell instructed members of the House Financial Services Committee last Thursday. "We're going to want to see evidence that it really is coming down before we declare any kind of victory."

Looking ahead

Durable goods orders, initial jobless claims, personal income, and consumer spending figures are expected to be released next week. Markets will closely monitor energy supply developments across Europe as the Russian invasion continues to disrupt.

Subscribe to receive our market insights and webinar invites

Concerned about managing financial risk in today's market?

Schedule a call with our team.

About the author

  • Joseph Rock

    Associate
    Treasury Advisory

    Corporates | Denver, CO


Disclaimers

Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

22-0167