U.S. Gross Domestic Product (GDP) fell at an annualized pace of 1.6% in the first quarter, a sudden reversal off of the U.S. economy’s best performance since 1984. This number falls below the Dow Jones estimate of a 1% gain, as GDP was weighed down by the inflation surge, drop in private investment, defense spending, and an expanding trade deficit. The ‘advance’ estimate for second quarter GDP will be released on July 28. Nonfarm payrolls rose by 372,000 in June, while the unemployment rate remained at 3.6%. Consumer confidence fell in June, hitting its lowest level since February 2021, on concerns about inflation and continued rate hikes.
Core CPI, which excludes food and energy prices, rose by 5.9% for the year through June, while headline CPI, which includes all items, increased 9.1% from a year ago, landing above the Dow Jones estimate of 8.8%. This is the fastest pace for inflation since 1981. Consumers saw costs for gasoline, groceries, and rent surge. On a 12-month basis, gasoline prices were up nearly 60%, as energy prices were up 41.6%. Shelter costs were up 5.6% for the year, as rental costs rose by 0.8% in June, which is the largest monthly increase since 1986. Wages grew at an annual rate of 5.1%.
The Fed approved an additional interest rate increase of 0.75% in June. In June, expectations were for another 0.50%-0.75% rate hike to occur in July. However, once June inflation numbers were released, this range shifted upwards, to expectations for a 0.75%-1.0% rate increase. Additionally, the Fed has ceased its monthly bond-buying program, which was intended to maintain market liquidity while keeping rates low in key sectors. Fed officials lowered their GDP forecasts for 2022 to 1.7%, after previously noting a 2.8% estimate in March.
The Bloomberg U.S. Aggregate index fell 4.7% as fixed income sector returns struggled for the quarter. The only positive performing sector was 3-month T-bills, which were up 0.3%. Developed international and long government/credit bonds underperformed all other segments of the bond market, down 12.5% and 12.3%, respectively. The yield on the 10-year Treasury note ended the quarter at 2.98%, while the 30-year Treasury bond ended the quarter with a 3.14% yield.
The S&P 500® continued to fall, as the index was down 16.1% for the quarter while all sectors experienced negative returns. The consumer discretionary, communication services, and information technology sectors had the weakest performance, while consumer staples and utilities saw the least pain, down 4.6% and 5.1%, respectively. Value outperformed growth across the capitalization spectrum. The forward P/E for the S&P 500® ended the quarter at 15.9x, falling below the 25-year average of 16.9x. The index’s 10 largest stocks traded at 23.6x.
U.S. equity lagged developed international markets and emerging markets (EM) as all experienced negative returns. The MSCI World ex-USA index, which includes developed countries, declined by 14.4% for the quarter, and the MSCI ACWI ex-USA index, which includes developed and EM countries, fell 13.5%. EM equities declined 11.3% for the quarter as major markets saw negative returns. China was down 11.2% in the second quarter, and Russia’s markets have been slow to reopen to foreign investors.
Commodities have led all asset classes year-to-date, up 18.4%, as all remaining asset classes besides cash have had significant negative returns. The Bloomberg Commodity Index decreased marginally since last quarter, led by a 24.2% drop in industrial metals prices, despite natural gas and crude oil prices jumping 22.7% and 9.5%, respectively. Gold prices decreased modestly in the second quarter by 7.0% to $1,817.50/ounce.
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