Weekly Macro Minute

GuideStone Reflections

There is an occasion for everything, and a time for every activity under heaven…

Ecclesiastes 3:1

In the first eight verses of this chapter, the author – simply known as “the Preacher” – gives us a grand poetic sweep of the seasons of life, telling us that there is an appropriate time for everything. There are seasons filled with enjoyment, and seasons filled with not-so-enjoyable things – like saying goodbye, mourning and even tearing down. When we read through this list, we tend to assume that it’s up to us to decide when these seasons begin and end. We want to decide when to build or when to take apart. We want to choose when it’s time to stop mourning and rejoice.

But the Preacher offers us a profoundly different perspective in this chapter. He tells us that God sets the seasons of human life, just like He sets the seasons of nature. Our job is to accept the seasons that God gives us with thankfulness and enjoy Him. He is in control and working to make everything beautiful in its time: “God works so that people will be in awe of Him” (v. 14).

Years ago, the movie Dead Poets Society popularized the Latin phrase carpe diem, or “seize the day,” meaning take control of life and wrest whatever you want from it. But according to the Preacher, we’re not supposed to “seize the day.” Instead, we’re supposed to “receive the day” – accipio diem. Receive the day with thankfulness and take enjoyment in worship, work, rest and the other gifts of life that He gives. And for those days – those seasons of life – that are not so enjoyable, receive those days with thankfulness as well, knowing that He is still using those times to shape you into the glorious image of Christ He wants you to be.

Accipio Diem! Receive the Day!

In the Economy

A hawkish Federal Reserve raised the federal funds rate by 75 basis points on Wednesday, going out of its way to emphasize its commitment to return inflation to its 2% objective. While Powell insisted in the press conference that “there’s no sign of a broader slowdown” in the economy, economic releases this week suggest otherwise. The housing sector is under strain due to the massive surge in mortgage rates. Building permits fell 7% in May and housing starts sank 14.4%. Retail sales disappointed with a 0.3% decline in May, suggesting that the consumer is retrenching as inflation takes a bite out of purchasing power. In a further sign of confidence erosion, a survey from the Conference Board released on Friday found that 60% of CEOs expect the economy to contract in their primary area of operations in the next 12 to 18 months, with around 15% saying they believe their region has already entered recession. Weekly jobless claims came in above consensus at 229K, reflecting a labor market that has already peaked. Finally, pain at the pump remains a real headwind to the consumer as the average price of gasoline sat at $5/gallon during the week.

U.S. equities began the week on a soft note due to inflation fears and then saw losses accelerate on Thursday after the market processed the implications of the Federal Reserve’s aggressive stance along with the weak economic data. By the end of the week, U.S. equity markets had suffered a second straight week of severe losses. This route in stocks was extremely broad-based to a nearly unprecedented degree – in five of the last seven sessions, at least 90% of stocks saw declines.

European markets fell sharply on similar concerns, as central banks across Europe raised rates despite faltering growth due to painfully high inflation. Some central banks took markets by surprise with unexpected rate hikes and the European Central Bank (“ECB”) held an unscheduled meeting on Thursday to deal with soaring borrowing costs for peripheral Europe, as Italian 10-year rates breached 4% and stoked fears that another eurozone debt crisis could unfold. The ECB indicated that it would take measures to stem the problem by targeting reinvestment of maturing debt and that settled down rates. Japanese markets tumbled in tandem this week while the yen remained near 24-year lows and the BOJ maintained an ultra-accommodative policy. China bucked the trend to finish higher for a second straight week on some improved economic data but also remains in a difficult spot economically, as the U.S. envoy to China expects COVID zero to persist into 2023 adding risks to growth.

Our base case for the U.S. economy remains a (hopefully) shallow recession beginning in late 2022 or early 2023. We believe this outcome will be enough to correct many of the imbalances present today while reducing inflation to a more manageable level. However, a technical recession (two consecutive quarters of negative growth in real GDP) is unlikely to lower inflation to the Fed’s 2% goal over a tolerable time frame. Some analysts have suggested that the Fed may eventually alter guidance to tolerate a higher level of inflation going forward, as it will be hard-pressed to be aggressive enough before challenging growth conditions make additional increases untenable. Thus, the Fed may opt to end its tightening cycle before hiking to the rate level baked into current market pricing. Unfortunately, this also means that the Fed will have trouble pursuing a significantly easier monetary policy to spur growth should inflation remain excessive.

Across the Markets

• The S&P 500® Index recorded its worst weekly decline since March 2020 and ended the week nearly 24% off its January peak.
• The S&P 500® energy sector led declines, plunging 17.1% on the week as WTI fell over $10/bbl on a weaker demand outlook to close at $109/bbl.
• Bondholders also suffered as expectations surrounding rate increases and inflation sent the U.S. 10-year yield to its highest in over a decade, briefly touching 3.49%, before ending the week at 3.24%.
• The Atlanta Fed’s GDPNow model estimate for U.S. real GDP growth for the second quarter of 2022 sank to flat (0.0% GDP) after a weak housing starts report.
• That estimate highlights the real risk that the economy may already be drifting towards what feels like an inevitable recession even while the Fed has just kicked its tightening path into high gear.