The week in review
- Unemployment nudged up to 3.7%
- 2Y closed Aug. at a 15-year high of 3.5%
- U.S. mfg. PMI came in at 51.5 (-.7pts from July)
The week ahead
- August Services PMI
- Consumer credit
- OPEC+ meeting
Thought of the week
From bonds (U.S. Fixed Income -2.8%, Global High Yield -1.5%) to equities (U.S. Large Cap -4.1%, U.S. Small Cap -2.0%) to commodities (Bloomberg Commodity Index +0.1%), major asset classes disappointed across the board in August. Nearly every market is being driven by the path of central bank policy and its impact on the economy. While investors were hopeful for dovish signals at Jackson Hole, they were forced to readjust their summer expectations from a dovish pivot to a Fed strategy of “hike and hold” next year. Accordingly, markets are now pricing in a 70% likelihood of a 75-bps hike in September, followed by a 50-bps hike in November and a 25-bps hike in December, bringing the year-end federal funds rate range to 3.75-4.00%. Expectations for rate cuts in 2023 were pushed back, as markets brace for a higher rates for longer environment.Treasury yields have also factored in this continued hawkishness with the 2Y hitting 3.5% last week, its highest level since 2007.
Summer may be drifting away, but volatility is here to stay this fall. From European energy woes to China COVID-19 zero policy to the Russia/Ukraine war to recession speak, investors have a lot to grapple with. The only real certainty is that global central banks remain laser focused on taming inflation and are willing to sacrifice some softness in the economy and labor market to do so. Against this backdrop, investors should be prepared for near-term volatility by focusing on defensive positioning and valuations that could favor long-duration bonds, value stocks and income-generating alternatives over more aggressive investments.