With summer ending and school starting, the rally in investment markets from July came to an end in August with the stock and bond markets both posting negative returns for the month. Volatility began to rear its head as economic data and commentary from the Federal Reserve (Fed) took center stage, yet again.
On the data front, inflation came in better than expected with the first signs of deacceleration on a year over year basis from its peak. This led the market to question if further rate hikes from the Fed could be reduced and possibly the return of a more accommodative stance in the outlook of monetary policy. As a result, markets started August continuing where July left off. Other data points, like the PMI and revised GDP, were continuing to point to economic slowdown providing more support for the view of the possible reduction in further interest rate hikes.
Fast forward to the latter part of August and the market was hit with the realization that interest rates hikes were here to stay. In a speech given by the Fed Chairman, Jerome Powell, he told the world that reducing inflation is their “overreaching focus” and that in order to achieve this goal it would most likely “bring some pain to households and businesses”. Both bond and stock markets sold off in the following days completely reversing the gains from the first half of the month.
While the Fed still believes a ‘soft landing’ is viable, the economic data are pointing to the contrary. Even the job market, which is still positive, has slowed slightly with the most recent reading. Of course, one report does not make a trend and there are still indicators that are showing favorable results. However, as we continue to get a clearer picture of the economy, it is evident that some parts are struggling far more than others.
