Friday's Market Minute: Inflation Is Taking A Toll On Household Spending

The market mood is still dominated by the possibility of recession in the U.S. The days of being able to rely on central banks easing monetary policy to support economic growth and the markets are nowhere to be found.

Jay Powell has warned that if the central bank does not raise interest rates high enough to combat inflation quickly, the U.S. could face severe and repeated bouts of price rises that policymakers could struggle to rein in. With western global central banks moving in tandem effort to fight inflation, rising recession fears produced the worst start to the first half of a year since 1970.

U.S. economic data is driving home the point that recession risks continue to grow, and inflation is taking a toll on household spending. The income and spending data published this week was not encouraging. Earnings rose 0.5% as expected, a slight acceleration from April, while spending rose only 0.2%, a big drop from 0.9% a month earlier and half the forecast.

Along with weak data from the U.S. housing market, anemic consumer confidence data is of concern because rising prices may spillover into slowing business investment and hinder corporate earnings power.

Many investors feel we are getting close to the bottom and that now isn’t that bad of time to start to scale into a longer-term position. However, institutional investors are still hesitant to buy outside of defensive sectors ahead of ongoing Fed rate hikes, and confirmation of weaker earnings expectations could be the next phase of the market correction. The headline CPI inflation data over the next few months will have to reflect falling commodity prices and thus allow the Fed to make a dovish turn.

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