August 2022 capital markets outlook and risk metrics
After the broad market rally in July (a significant reversal from the prior six months), markets swung back into negative territory across most asset classes as concerns regarding persistent and elevated inflation and weakening growth weighed on US and international markets. As a result of these concerns, markets are slowly pricing in even higher interest rates and deteriorating economic fundamentals, although US labor markets remain a bright spot.
The critical challenge of taming inflation without significantly derailing economic growth, and the central banks’ ability to do so, remains the most discussed macroeconomic consideration.
The US yield curve inverted as near-term rates rose rapidly in response to hawkish comments from Fed Chairman Powell, and the 10-year minus 2-year yield exceeded -30 bps, a level not seen since the late 1990s.
Bond and equity market volatility remained at elevated levels as markets struggled to reprice future rate and growth expectations as monetary policy shifts to data dependence and away from forward guidance. Of particular importance, key inflation metrics remain very high, indicating entrenched underlying inflationary pressures.
China continues to provide policy stimulus to offset the slowdown in the real estate and other sectors. Moreover, emerging markets that export energy and commodities are experiencing some economic benefit from the energy crisis caused by the war in Ukraine, and these tailwinds helped emerging market equities outperform developed markets.
After a positive month of performance in July, most bond indices posted negative returns in August, though US Treasuries fared better than corporate debt as spreads widened.
Commodities finished the month flat, where positive prices for energy and food were offset by falling prices for industrial metals, lumber, and copper. However, public natural resources posted positive returns with strong revenue growth from energy companies.