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Key Points for the Week

  • The Consumer Price Index (CPI) was flat last month, and core inflation increased 0.3%. Both numbers were 0.2% lower than expected.
  • Expectations for future interest rate hikes fell in response to the CPI report after the previous week’s strong jobs report prompted them to rise.
  • Market breadth is improving; 80% of the S&P 500 is above its 50-day moving average.

Upcoming Changes to the College Financial Aid Formula

The Free Application for Federal Student Aid (FAFSA) is a form completed by current and prospective college students to determine their eligibility for student financial aid. In addition, states and colleges use FAFSA information to award their own grants, scholarships, and loans. But, since aid is limited, you have to meet the deadlines. For federal student aid for the 2022-2023 academic year, the FAFSA form must be submitted by June 30, 2023. Each state has its own deadline which is earlier, and each college may have its own deadline. To find these deadlines, click here.

If you currently have a child in college, or one that will be going to college in the near future, you can learn about the upcoming changes to the college financial aid formula here. If you have any questions about these changes, or how saving for college fits within the scope of your financial plan, please contact us.

Economic Update

In recent weeks, investors have embraced the idea that economic data will persuade the Federal Reserve to slow the pace of interest rate hikes. Last week’s inflation data fanned their enthusiasm.

The big news was that the Consumer Price Index (CPI), which measures inflation, didn’t change from June to July. That doesn’t mean all prices remained the same during the month. They didn’t. For instance, the cost of energy dropped by 4.6 percent, while the cost of food rose by 1.1 percent. When all price changes were combined, the overall result was zero percent inflation for the month of July. Year-to-year, though, the CPI was up 8.5 percent.

Investors didn’t seem to care that a single month is not a trend, and stocks moved higher.

The gains this week continue a longer run for the stock market, which had already been optimistic that evidence would point to peak inflation…The hope is that cooling inflation will make the Federal Reserve more likely to slow down the pace of interest rate hikes. That narrative got another boost Thursday. The producer price index for July gained 9.8% year-over-year, below expectations for 10.4% and below June’s result. This may mean that inflation has peaked (“peak inflation thesis”), as companies would raise prices at a slower pace, given that their costs are rising at a slower pace.

Joe Woelfel and Jacob Sonenshine, Barron’s

The bond market did not react the same way, as the U.S. Treasury yield curve steepened after CPI data was released. While this suggested optimism, the curve remained inverted, leading bond investors to believe that the current Federal Reserve’s policy of raising interest rates and tightening monetary policy could lead to a recession in the future.

Bloomberg’s July survey of economists put the chance of a recession within the next year just below 50-50, according to Vince Golle and Kyungjin Yoo.

Last week, the Standard & Poor’s 500 Index delivered a fourth consecutive week of gains, the Dow Jones Industrial Average trimmed its losses for the year, and the Nasdaq Composite was up 20 percent from its June low, reported Andrew Bary of Barron’s.

This Week in the Markets

Inflation slowed significantly in July. Lower energy prices, including a 7.7% decline in gasoline prices, helped the Consumer Price Index stay flat. Food and shelter costs helped offset the decline in energy prices. The core inflation rate fell to 0.3%, suggesting inflationary pressures are present but moderating from previous months. Estimates for both data points were 0.2% higher than the actual data. The annual inflation rate remains elevated at 8.5%. Producer prices reflected a similar trend as the Producer Price Index fell 0.5% last month.

Expectations for future rate hikes fell after the inflation data. The expected rate increase, at the September Fed meeting dipped from 0.75% to 0.50%. Market expectations have been volatile. The strong jobs report earlier this month raised expectations for faster rate hikes, while the weak inflation report reversed them.

Stocks responded positively to the news. Markets added to recent gains. The S&P 500 and MSC ACWI both soared last week. The S&P 500 is now down 9.9% from its record high. The Bloomberg Aggregate Bond Index added slightly. This week will be relatively quiet for key economic releases. Retail sales will be released in the U.S. and China. The reports will provide additional information on how consumers are acting in the world’s two largest economies.

CTN 08-15-22 Image 1

A Respite from Rising Prices

The Consumer Price Index for all Urban Consumers was unchanged in July on a seasonally adjusted basis after rising 1.3 percent in June, according to the Bureau of Labor Statistics’ (BLS) Consumer Price Index report for July. In other words, the rate of price changes, i.e., inflation, was flat last month. July’s report showed the lowest monthly increase since May 2020 and fell short of expectations for a 0.2% increase.

It was a welcome respite from the rapid increase in inflation that has gone on for more than a year. As the BLS noted in the report, prices have increased 8.5% over the last 12 months. The big driver for inflation running at a pace of 8.5% over the past year has been rising energy prices. But those fell 4.6% in July and were mostly responsible for headline inflation coming in flat. Gasoline prices, which are closely watched by the public, fell 7.7%. Food prices continued to increase, rising 1% in July and offsetting some of the decline in energy prices.

The real surprise was below the headline number. Core prices (for items excluding food and energy) were expected to rise 0.5% in July, but they came in at 0.3%. This is the smallest monthly gain in core prices in 10 months. The details were very positive, with core inflation easing across a broad range of categories. Prices for used vehicles fell in July, as did prices for several other pandemic-impacted services, such as airline fares, hotels, and car and truck rentals, thus imposing a deflationary force for the first time in almost a year. Price changes in other categories, such as medical care, internet services and child care, also slowed or reversed.

One major concern was prices for shelter (rentals and owner-occupied) continued to rise at a pace well above pre-pandemic levels. It eased a bit in July but nowhere near enough to pull inflation back toward the Fed’s 2% target anytime soon.

Even if core inflation runs at a monthly pace of 0.3% over the next 12 months, yearly inflation would add up to 3.8%. That would be higher than at any point in the last 15 years, prior to this year. Combine this with the strong wage growth from last week’s payroll report, and it seems likely the Fed will continue its urgent pace of rate hikes, including a 0.75% increase in the federal funds rate at its September meeting.

Markets clearly do not agree with this assessment and are currently pricing in a 0.50% increase next month. This is a reversal from expectations for a 0.75% increase that was priced in immediately after a surprisingly strong employment report. But we’re likely to bounce back and forth over the next few weeks.

The Fed is no longer giving any guidance for its upcoming moves; instead saying it will be “data dependent.” This report supports that stance as the rapid rate hikes and gradual balance sheet reduction seem to be having some effect on inflation. A lot of data will be released between now and the Fed’s September meeting, including PCE price index data for July (Fed’s preferred inflation indicator) as well as employment and CPI inflation data for August. All these reports could result in higher volatility as investors scour them for clues on the committee’s next steps and whether July’s data was a brief respite or a new trend.

Where are the Best Places to Live in the World?

This year, the Economist Intelligence Unit conducted a “liveability” study to evaluate which cities around the world had the most to offer residents. They analyzed 30 quantitative and qualitative factors across five categories – stability, healthcare, culture and environment, education, and infrastructure – in 172 cities.

As it turns out North America is the second most livable region of the world, trailing just behind Western Europe. Every North American city in the survey received a score of at least 80 out of 100. The top cities in North America included:

  1. Calgary
  2. Vancouver
  3. Toronto
  4. Montreal
  5. Atlanta
  6. Washington, D.C.
  7. Honolulu
  8. Pittsburgh
  9. Los Angeles
  10. Seattle

The desirability of North American cities may explain why more people are moving to the continent.

Over 630,000 people moved to North America from other parts of the world in the first half of 2022, a rise of 51% from the same period a year earlier.

The Economist

In case you’re wondering, the least livable cities in North America – and no place had a low score – were Lexington, Detroit, Houston, Cleveland and New York.

Where would you live if you could choose anywhere in the world?

The IRS Backlog Continues

As of May 31st, The IRS was still sitting on 21.3 million unprocessed tax returns. This continuous growing backlog has left many taxpayers waiting at least 10 months for their refunds from their returns. According to the Taxpayer Advocate Service, the primary reason for this backlog is that about 17 million taxpayers filed paper returns, and added that the agency is almost finished processing 2021 tax returns. The IRS announced in March their plan to hire 5,000 new employees, but as of May they had hired less than half of their goal.

Potential New Tax Provisions

New tax provisions have been included in recent legislation agreed upon by Senate Democrats. This legislation, known as the Inflation Reduction Act of 2022, also aims at lowering carbon emissions and reducing healthcare costs. Proposed tax changes in the bill include:

  • 15% corporate minimum tax on companies with profits greater than $1 billion in book income.
  • Enhanced tax enforcement efforts at the IRS (more audits of more taxpayers).
  • Residential energy credits are now extended to 2032.
  • Both the solar and wind credits are increased back to 30% and extended for 10 years.
  • The electric car credit of $7,500 is restored but the car must meet US component thresholds (estimates are that only 30% of the current vehicle market would qualify).
  • A new credit of up to $4,000 for the purchase of a used electric vehicle by lower income taxpayers. This provision is subject to several restrictions.
  • The credit for the alternative energy refueling station has been extended.

The Inflation Reduction Act has now been passed and signed into law by President Biden. The bill is expected to raise about $739 billion in revenue, and is projected to reduce the budget deficit by roughly $300 billion in ten years.

Did you Know? This Week in History

August 15, 1969: Woodstock Festival Opens in Bethel, New York

On August 15, 1969, the Woodstock music festival opened on a patch of farmland in the small New York town of Bethel.

Promoters John Roberts, Joel Rosenman, Artie Kornfield and Michael Lang originally envisioned the festival as a way to raise funds to build a recording studio and rock-and-roll retreat near the town of Woodstock, New York. Despite their relative inexperience, they were able to sign a roster of top acts, including the Jefferson Airplane, the Who, the Grateful Dead, Sly and the Family Stone, Janis Joplin, Jimi Hendrix, Creedence Clearwater Revival and many more.

Early estimates of attendance increased from 50,000 to around 200,000, but by the time the gates opened on Friday, August 15, more than 400,000 people were clamoring to get in. Those without tickets simply walked through gaps in the fences, and the organizers were eventually forced to make the event free of charge.

Though Woodstock had left its promoters nearly bankrupt, their ownership of the film and recording rights more than compensated for the losses after the release of a hit documentary film in 1970. Later music festivals inspired by Woodstock’s success failed to live up to its standard, and the festival still stands for many as an example of America’s 1960s youth counterculture at its best.

Weekly Focus

The only lasting truth is change.

Octavia Butler, Science Fiction Author

What’s another word for Thesaurus?

Steven Wright, Stand-Up Comedian