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Key Points for the Week

  • The European Central Bank joined the inflation fight, raising rates 0.5%. Japan left rates unchanged.
  • The United Kingdom continues to lead all G7 countries with a 9.4% inflation rate.
  • Housing starts fell 2% last month as higher interest rates pushed demand lower.

Things to Consider While Planning for College

Whether you have a newborn child or a family member about to enroll in college, it is quite likely that the cost of a college degree today and in the future has crossed your mind.

In 2022, the average cost per year for in-state tuition of a 4-year public university is $27,000. The average cost for out-of-state tuition is $44,000. If you are looking for a 4-year private school, the average tuition is even higher. The sticker shock is exacerbated with the knowledge that those average costs are only for tuition and that other costs, such as room and board, books, laptops, personal living expenses, and other miscellaneous costs will crop up throughout the year.

With this in mind, our human-centric team has compiled a guide that you can access here with questions and aspects to consider today and down the road. If you have any questions about the guide or how college planning fits within the scope of your financial plan, please contact us.

Economic Update

A lot of people are worried that a recession may be in our future. Some think it may already be here.

Unemployment is low (3.6 percent), and inflation is high (9.1 percent). Both tend to occur when an economy is experiencing strong growth. That makes it difficult to believe the United States is in a recession, but some data is pointing that way.

Last week, the Atlanta Federal Reserve’s GDPNow estimated that economic growth in the United States was -1.6 percent for the second quarter of 2022, after adjusting for inflation. They measured economic growth using gross domestic product or GDP, which is the value of all goods and services produced in the United States over a specific period of time. GDPNow is based on a simple, unadjusted mathematical model. It is not an official reading, and the model tends to be a bit volatile. For example:

  • On April 29, when relatively little data was available for the second quarter, it was +1.9 percent.
  • On May 17, as retail trade and industrial production statistics filtered in, it was +2.5 percent.
  • On July 1, when construction spending and manufacturing data came out, it was -2.1 percent.
  • Last week, after housing starts were released, it was -1.6 percent.

The Atlanta Fed’s estimate becomes more accurate as more data is added. It tends to be most accurate near the Bureau of Economic Analysis (BES)’s official GDP release date, reported a source cited by Jeff Cox of CNBC.

Since the United States economy shrank by 1.6 percent in the first quarter of 2022, that would mean the U.S. has experienced two quarters of declining economic growth. Technically, that’s a recession.

Not everyone expects GDP to shrink. Bloomberg surveyed economists and found they anticipate 0.5 percent growth in the second quarter, which would be an improvement on the first quarter.

There is an important distinction between the two quarters. The slowdown in the first quarter was caused by surging imports and slowing exports, which is unusual. The slowdown in the second quarter may be caused by a slowdown in consumer spending, which is the primary driver of U.S. economic growth, and business spending.

The next BEA’s GDP numbers will be released this Thursday, July 28.

This Week in the Markets

Central banks are playing the leading role in today’s markets. Last week, the European Central Bank raised interest rates 0.5%, pulling the deposit facility rate to 0%. It is the first interest rate increase in 11 years and the first time the rate hasn’t been negative in eight years. Japan’s central bank took a different approach, leaving rates stable. The Japanese Consumer Price Index has only risen 2.3% in the last year. That is much higher than normal but close to the target of 2%.

The U.K. is on the other end of the inflation spectrum. Inflation in Britain jumped 0.8% last month and is now 9.4% higher than one year ago. The Bank of England indicated a 0.50% hike is possible at the next meeting given that inflation has remained elevated despite a steady stream of 0.25% rate increases.

The domestic housing market is starting to respond to higher interest rates in the U.S. Housing starts fell 2%, the second straight monthly decline. The Federal Reserve is likely to reduce demand further by increasing interest rates 0.75% at its meeting this week.

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Markets seem to have priced many of these events in already. The S&P 500 and the global MSCI ACWI both rebounded last week. The Bloomberg Aggregate Bond Index also rallied as long-term rates declined despite the widely expected additional rate increases.

Fighting Inflation

More central banks are joining the effort to reduce excess global demand. Until last week three major players hadn’t raised rates: the European Union, China, and Japan. We will examine each country as we look toward the Federal Reserve interest rate decision this week.

The European Central Bank surprised markets last week by raising interest rates 0.50% to 0%. The reason this is so surprising is it is the first time in 11 years that the ECB increased interest rates. In fact, this is the first time in eight years that the deposit rate in Europe is positive. The market expected the increase to be 0.25%, but June’s outsized inflation report at 8.6% caused the ECB to raise rates more aggressively.

Interestingly, the ECB didn’t provide any forward guidance on moves it may make later this year. It has signaled it will be data-dependent, meaning it will wait to see what the July inflation number looks like. One reason the ECB may be hesitant to raise rates too quickly is Europe’s inflation is being driven by supply issues, especially on energy due to the conflict in Russia. The European economy has weakened as the sanctions on Russia have slowed growth. Exacerbating the problem is weakness in the euro. The euro is as weak as it’s been in the past 20 years, which is making energy imports priced in U.S. dollars even more expensive. A 0.50% increase showed markets the ECB was serious, while the lack of future guidance reflects the weak European economy.

Japan’s central bank has been the lone holdout of major developed economies. The Bank of Japan announced last week that it would keep interest rates unchanged, with its short-term rates remaining at -0.1. This comes despite the weakest level for the yen versus the U.S. dollar since 1998. The fear from BOJ governors is that any increase in rates, even to stop the fall of the yen, would be too damaging to Japan’s economic recovery. The difference is Japan is experiencing much more muted inflation than the U.S. and Europe. The expectation in Japan is that core inflation will increase by only 2.3% over the next year.

China’s monetary policy has moved in the opposite direction from the rest of the world. The Chinese have actually cut rates and taken other steps to invigorate the economy. At first glance this doesn’t make much sense, as China is a big importer of energy. China’s situation is different because it will buy oil from Russia, likely at a lower price than what the rest of the world pays. It also continues to lock down cities and engage in strong forms of social distancing. By restricting activity, the Chinese are effectively pushing down demand for all sorts of goods and services, and those policies are likely doing more to slow their economy than a 0.50% rate hike.

We expect central banks to ratchet up the pressure more next week. The Fed is expected to raise rates 0.75% when its meeting concludes on Wednesday, matching June’s increase. Any other outcome would be surprising. Fed Chair Jerome Powell’s press conference after the meeting will be watched closely for future guidance. If rates move up 0.75%, the target rate will be 2.25-2.5%, which is above what the economy could sustain before COVID.

Our expectation is the broad number of nations tightening policy will start to reduce the effects of excess demand on inflation and remove some of the pressure from supply-constrained markets at the same time. The Fed moving rates past what many believe is neutral means short-term rates will be working to slow the economy. The ECB moving rates to 0% means the strange incentives encouraged by negative rates will disappear. Every rate hike helps to slow the economy, but the ECB hike last week and the expected Fed move this week are key events in the fight against inflation.

The Challenges of Dating

As if the pandemic didn’t create enough dating challenges, inflation is now pushing the cost of dating a lot higher. More than 40 percent of people on the dating app Hinge said they think more about the cost of dating today than they did a year ago, especially members of Gen Z (the oldest Gen Zers are age 25), reported Paulina Cachero of Bloomberg.

Instead of meeting for drinks (the cost of alcoholic beverages was up 4 percent year-over-year in June) or sharing a meal in a restaurant (the cost of full-service dining was up 8.9 percent year-over-year in June) many people are opting for less expensive options, such as meeting for coffee, taking a walk, or cooking a meal at home.

Another challenge is keeping up with ever-evolving dating slang. Here are a few definitions to know.

  • Breadcrumbing. This is slang for leading someone on. Usually, breadcrumbing is chatting or flirting online through text or social media.
  • Orbiting. When an ex – or someone else – stops communicating completely (i.e., they ghosted you) but they immediately offer a reaction when you post a picture or story on social media, they are orbiting you, reported Sophie Lloyd of Newsweek.
  • Soft launching. When a product is soft launched, it goes through testing in limited groups. It’s the same with dating. A soft launch gives a person’s friends and followers the chance to get used to the idea of a significant other. It’s a slow-motion version of the boyfriend or girlfriend reveal, reported Kaitlyn Tiffany of The Atlantic.

It’s never easy to learn a new language.

Did you Know? This Week in History

July 29, 1967: The Doors Score Their First #1 Hit with “Light My Fire”

By the beginning of 1967, The Doors were well-established members of the Los Angeles music scene. After their now-classic debut single, “Break On Through” failed to make the national sales charts despite the efforts of Jim Morrison and his bandmates to fuel the song’s popularity by repeatedly calling in requests for it to local L.A. radio stations. It was the follow-up release from their debut album, The Doors, which would become their first bona fide smash.

“Light My Fire,” which earned the top spot in the Billboard Hot 100 on July 29, 1967, transformed The Doors from cult favorites into international pop stars of the 1960s, and became the first single from Elektra Records to reach number one on the Billboard Hot 100 singles chart, selling over one million copies.

The Doors would follow up “Light My Fire” with a string of era-defining albums and songs, including “People Are Strange,” “Love Me Two Times” and “The End” in 1967; “Hello, I Love You” and “Touch Me” in 1968; and “L.A. Woman” and “Riders on the Storm” in 1971.The Doors would go on to sell over 34 million albums in the United States and over 100 million albums worldwide, making them one of the best-selling bands of all time.

Weekly Focus

I have only to break into the tightness of a strawberry, and I see summer, its dust and lowering skies.

Toni Morrison, Novelist

Hope without action is willful denial.

Rebecca Scherm, Author