Last week there was unrest in the financial markets due to concerns that the Fed will raise interest rates even more due to the eurozone’s declining growth prospects and the PPI and CPI indexes in the US reaching new heights. That appears unlikely now.

However, inflation is still on the top of investors’ minds. Do you recall last year when the Fed discussed temporary inflation? It would appear that we are still in the transitional stage.

With a 9.1 percent year-over-year gain on Wednesday, inflation is continuing to rise. Although not as awful as anticipated for US banks, we nevertheless experienced some relatively poor initial earnings. This week we will see numerous companies’ reports which will drive the market.

KEY MARKET DRIVERS & CALENDAR

• Tuesday, July 19 – Building Permits (MoM) (June)
• Thursday, July 21 – Philadelphia Fed Manufacturing Index (July)
• Company Earnings

This week will include relatively few economic indicators, including existing house sales, housing starts, and the Philadelphia Fed Manufacturing Index. Before the FOMC meeting on July 26–27, the Federal Reserve will be silent. However, futures trading on the fed funds contract will be eagerly monitored as the chances of a 100-point raise swing widely.

The week will be dominated by earnings reports as well-known companies like Twitter (TWTR), Netflix (NFLX), Tesla (TSLA), and Bank of America (BAC) report amid lots of turmoil. While recent readings on consumer demand, labor shortages, and supply chain difficulties will still be crucial, investors have already factored in that the earnings season will reveal some disappointments and downward revisions.

S&P 500 SECTORS

Tip: Use this section to know various sectors’ performance and weight portfolios, or look for trades. Modern portfolio theory stresses the importance of diversification, but recently several sectors like technology have outperformed others like utilities. This is also a way to narrow the sectors to find investment opportunities.

Bad Week For China

Beijing has had a bad week. The second quarter of 2018 saw a significant slowdown in the Chinese economy due to numerous lockdowns. The second-largest economy in the world had its GDP decrease by 2.6 percent from April through May and June, significantly less than the average prediction of a decline of about 1.4 percent. The People’s Bank of China must now decide whether to decrease interest rates or not in light of this. The first option runs the danger of rising inflation, which has been kept at a manageable level up until now. The latter might send the economy into stagflation, mostly brought on by the slow growth.

Housing Tracker by Morgan Stanley

Investment behemoth Morgan Stanley predicts that new construction may decline by 9 percent and existing house sales by 16 percent annually in a recent note to clients. As housing prices rise and rates rise, new mortgage applications exhibit “incremental weakness each subsequent month.” As rising mortgage rates outpace falling prices in some locations, affordability keeps declining. The bank said that until May 2022, the average mortgage payment, including principal and interest, had climbed by 48%.

Recession risk is reviewed by JPMorgan.

The bank projects a 40% chance of a recession over the next 12 months, adding that a recession from commodity price shocks will probably be the reason, in response to CEO Jamie Dimon’s remarks about an economic hurricane. The possibility that Russia may stop exporting oil, which would cause the price of oil to increase to $190 per barrel, is of particular worry to JPMorgan analysts. JPMorgan acknowledges that central banks have fueled runaway inflation, and Dimon warns that “things can become much worse.”

Italy Gov’t Collapse

Mario Draghi, the prime minister of Italy, announced his resignation on Thursday in order to make room for a new administration. However, the country’s president rejected Draghi’s resignation and asked him to reconsider his ability to maintain a majority. It appears he will stay, but it remains a fluid situation.

RATES

This week, the US yield spread increased to a record high since 2000 in terms of bond yields. The current yield on ten-year US debt is 2.96 percent, which is 0.10 percent and 0.17 percent less than the yields on the 2 and 5-year maturities. Recall that a rate inversion typically signals the impending arrival of a recession and, in any event, confirms such anxieties. The negative trend in Europe is still there, with the French OAT dropping from 2.4 percent to 1.68 percent over 10 years, less than a month ago. The yield on the German bond for 10-year maturities is back to where it was at the end of May. Last but not least, the Italian 10-year has been holding steady at 3.35 percent since the start of the week, less than 1% below the mid-June peak.

INFLATION UPDATE

This week, inflation is again slightly down but hasn’t reversed the trend. In past rising interest rate environments, rising inflation came in waves. It will also become a major political issue going into elections as Americans pay more for everything.

We follow Truflation. Decentralized finance (DeFi) firm Truflation is based on the same calculation method as the CPI but is different in that it uses real “price data” versus the government’s survey data. It uses current real-market prices data from Zillow, Penn State, and Nielsen to measure and report inflation changes each day.

COMMODITIES

OIL

As recession fears grew this week, the prognosis for demand for black gold was negatively impacted, causing oil prices to plummet. The Fed is anticipated to raise interest rates by at least 75 basis points in response to the most recent US inflation figures, a significant move that might cause the US economy to enter a recession and reduce demand for oil.

But in reality, there is still a severe oil shortage, and OPEC repeated this in its most recent forecast, which is now for 2023. Despite concerns about a recession, the cartel anticipates a rise in global demand of about 2.7 million barrels per day (mbpd) in the coming year, with little or no space for supply growth. This has not stopped the two global benchmarks for oil, WTI, and Brent, from surpassing the USD 100 per barrel barrier.

GOLD

As worries about base metal demand weighed on the market, the industrial metals section continued to decline. Investor sentiment has been affected by the most recent economic data from China, where GDP shrank by 2.6 percent in the second quarter compared to the first. Copper is currently trading at about USD 7,200 per tonne, and gold is getting close to the USD 1,700 per ounce mark in precious metals, which is its lowest price since August of last year.

CRYPTOCURRENCY

The is a very complicated period also for crypto-investors. It is a sizable portion of the business presently in disarray, similar to OpenSee, which is reducing its employment by 20% due to the “unprecedented combination of macroeconomic volatility and the crypto winter.” The fact that Bitcoin has reached $21,600 for a second time since mid-June does not assist the situation at all.

That being said, Bitcoin may have found support for around $20K. My hat goes off to those that were brave enough to buy around that range.