Weekly Macro Minute


GuideStone Reflections

“Don’t call me Naomi. Call me Mara,” she answered, “for the Almighty has made me very bitter. (Ruth 1:20, CSB)

Naomi, her husband and two sons moved to the land of Moab to escape the devastating effects of a famine in their homeland Israel. Members of one of Israel’s leading families were forced to become refugees amongst their traditional enemies, the Moabites. Over the next ten years, Naomi lost her husband and then one son after another. Finally bereft of nearly everything, she made her way back to Israel accompanied by her faithful daughter-in-law, Ruth.

After a decade away, the ladies from her hometown were surprised to see her. They were probably even more surprised by her greeting. Naomi means “pleasant” or “lovely,” but she informed them that she had changed her name to Mara – “bitter” – to better reflect her new disposition.

Yet in her own way, Naomi modeled faith – a faith in pain. Her faith was in a sovereign God, one whom she took so seriously that she laid her disappointment right at His feet. She was not defiant or disobedient, just sincere.

A relationship of faith demands openness and honesty with the One in whom you have faith. Our Lord is a gracious God who welcomes brutal honesty from his people. An open and honest heart before God is fertile soil for the Holy Spirit to produce His fruit. He would rather have us talking at Him than not talking to Him at all. We can go to God with our disappointments. He’s big enough to handle them.

The story continues next week…

In the Economy

U.S. equities fell last week, giving back a portion of the prior week’s strong rally. Defensive sectors continued to outperform while consumer discretionary and information technology sectors were the weakest. The second quarter ended last Thursday, and it is difficult to overstate just how bad the first half of the year was for U.S. financial assets. In real terms, the typical 60-40 stock-bond portfolio just experienced its worst performance since the 1960s according to Goldman Sachs analysts. This weakness in financial assets, along with other elements such as a strong dollar, the roll-off of fiscal spending and rising federal funds rates has led to the most aggressive period of tightening monetary conditions in recent times apart from the COVID-era and the 2008 global financial crisis. Recession fears are front and center in markets and at least temporarily displacing inflation as the focused threat. In fact, the expectation is that the economy will weaken so much that by 2023 the Federal Reserve will be forced to reduce the federal funds rate by 75 basis points. This was evidenced last week in the continued fall in certain economically sensitive commodities (copper hit its lowest level in 17 months on Friday), declining Treasury yields and widening credit spreads (investment grade spreads widened past 150 bps). Recessionary fears have not altered expectations for the next couple of rate hikes, but they have dialed back expectations for the peak rate, now at 3.35%. The bottom line is that as long as inflation remains well above the Fed’s preferred level of 2%, we expect aggressive Fed tightening – and market volatility – to continue.

Shares in Europe were lower as the economic conditions deteriorated further. While Eurozone inflation accelerated to another record high of 8.6% in June, business and consumer confidence slumped lower for most countries, and unemployment in Germany unexpectedly rose to 5.3%. Despite weakening conditions economically, the central bank is still forced to play a hawkish hand until inflation shows signs of cooling. The Swedish central bank hiked rates by 50 basis points to 0.75% to fight inflation. Japan’s stock markets were also off over 2% in risk-off sentiment, while China stocks rose 1.3% to buck the trend with stocks advancing on stronger economic stats and easing coronavirus restrictions for travelers.

Domestically, signs of slowing growth abounded again with the data releases for the week. Consumers pulled back on spending. Adjusted for inflation, the May Personal Consumption Expenditures (“PCE”) fell 0.4%, the first decline this year. Other growth indicators also weakened more than expected with the ISM Manufacturing Index falling to 53.0 and new orders falling to 49.2 (below 50 signals contraction). On the bright side, and giving bonds a boost this week, the PCE core deflator (a preferred measure of inflation by the Fed) rose only 0.3% month-over-month, less than expected, bringing year-over-year gains to 6.3%. Core PCE (PCE excluding food and energy) rose 4.7% year-over-year. These measures add to the evidence that peak inflation may be behind us.

The Atlanta Fed’s GDPNow model estimate for U.S. real GDP growth for the second quarter of 2022 plunged into negative territory with a projected decline of -2.1% on weak ISM and construction spending data. If a reliable indicator, this is significant, because as we highlighted previously it would lead to back-to-back quarters of negative GDP prints – something that has never occurred historically outside of a National Bureau of Economic Research declared recession.

Across the Markets
  • The S&P 500® finished down -2.21% for the week.
  • Most sectors were lower, though the growth sector was particularly weak, trailing value by around 300 basis points.
  • The dollar saw solid gains this week against the euro, sterling, and commodity currencies, though was little changed on the yen cross.
  • The 10-year Treasury yield was down 25 basis points from 3.13% to 2.88%.
  • WTI crude ended the week up 0.8%.

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This information is prepared by GuideStone Capital Management, LLC®, a controlled affiliate of GuideStone Financial Resources®. This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. Diversification is not a guarantee against loss. This information does not represent any GuideStone® product. Special risks are inherent in international investing, including those related to currency fluctuations and foreign, political and economic events.

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