Investor sentiment recently changed from one of “risk-on” to “risk-off”. Regarding the macro view, data continues to be fluid and muddled.
The second estimate of second-quarter GDP was revised to -0.6% from -0.9%. Upward revisions in consumer spending and private inventory investment were partially offset by a downward revision in residential fixed investment. The third and final estimate of second-quarter GDP will be released on Sept. 29.
Consumer spending appeared somewhat resilient. Personal income for July rose month-over-month by 0.2%, below expectations but positive. This translated into a rise of 0.1% in Personal Consumption Expenditures (PCE) for July. That said, the rise of 0.08% in the Core PCE Deflator for July was well below expectations of 0.30% and June’s increase of 0.61%. The broader PCE Deflator fell 0.07%. versus expectations of a 0.05% rise and was materially below June’s report of 0.96%.
Another positive was the upside surprise exhibited by the Index of Consumer Sentiment from the University of Michigan. The final report for August was 58.2, well above consensus expectations of 55.2 and July’s 55.1.
With all this positive news, why the retracement? Questions abound as to inflation, specifically peak inflation in the U.S. and the outlook for the economy. These same concerns exist outside the United States.
Inflation remains top of mind to the Fed. At last week’s Jackson Hole Economic Symposium, Chair Powell reiterated the goal of the Federal Open Market Committee to “bring inflation back down to our 2% target”. He further stated that “July’s increase in the target range was the second 75 basis point increase in as many meetings, and I said then that another unusually large increase could be appropriate at our next meeting.” These comments specifically resulted in a rise in yields and a fade in equity markets.
Thus, it seemed that investor sentiment for August could be summed up as “the thrill is gone”.