Third Quarter Recap
2022’s stock and bond market volatility continued during the third quarter. Once again, the stock market’s trend changed intra-quarter as investors reacted to economic data and speculation. The S&P 500 declined 4.9%, while the 2-year Treasury yield reached levels not seen since 2007.
Inflation & Fed Policy Continued to Dominate Headlines
Markets received fresh inflation data and updated Federal Reserve commentary during the third quarter. Data showed inflation pressures, as measured by the year-over-year (y/y) growth rate of the Consumer Price Index (CPI), eased for a second consecutive month during August. This decline occurred against a backdrop of falling energy prices, with AAA reporting the average price of a gallon of gasoline down 27% since peaking at $5.01 in early June. Markets reacted positively to the two consecutive monthly inflation declines, hoping June’s 9% y/y inflation rate marked the peak.
Easing inflation pressures are a welcome development, but underlying data indicates inflation remains persistent across a broad range of categories. Unlike the headline CPI reading, the core CPI reading, which excludes the volatile food and energy categories, was higher during August at +6.3% y/y relative to June and July readings of +5.9% for each month. This divergence, with core CPI rising and headline CPI falling, grabbed the market’s attention and gave further conviction to the Fed to continue its tightening efforts to prevent inflation from becoming entrenched.
Prior to the third quarter, the Fed had just raised interest rates 0.75% at their June meeting, bringing the year-to-date rate hike total to 1.5%. This was the first 0.75% increase since 1994. The Fed followed June’s large interest rate increase with additional 0.75% increases at both the July and September meetings. The Fed also updated its Summary of Economic Projections at the September meeting for the first time since June. The Fed now projects the benchmark federal funds rate will end 2022 at 4.40%, which implies another 1.25% of interest rate increases by year-end. For comparison, in June the Fed’s year-end projection was 3.40%.
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