When it’s my week to write this recap, I tend to review the events of the previous week in chronological order before discussing what investors can expect for the week ahead. However, the markets are currently in a unique situation, so I will reverse that normal progression and discuss this week’s events first. The Federal Open Market Committee (FOMC) begins its two-day policy meeting tomorrow and will conclude with a decision on raising interest rates on Wednesday afternoon. Federal Reserve Chairman Jerome Powell has consistently stated that the FOMC expects to take a measured approach to raising target interest rates. This means in practice that they will systematically increase interest rates by 0.50% at their next meetings and do not expect to deviate from this plan. However, the CME Group’s Fed Watch tool indicates that the market thinks there is a 30% chance that the FOMC will reverse this trend and hike rates by 0.75% at this week’s meeting. A week ago, the market was implying only a 3% chance that the FOMC would continue up 0.75%. So what happened that would have caused such a drastic shift in expectations in just one week?
Friday saw the release of the Consumer Price Index (CPI) for May. The consensus expected the reading to show that inflation peaked in April and would start to decline through the rest of 2022. Consensus expectations were wrong – CPI rose 8.6% YoY on the other in May, up from the previous reading of 8.3% and ahead of the 8.2% expected. Notably, it’s the biggest annual increase in the CPI in over 40 years – something Jerome Powell and company won’t write home. Many believed that a slowdown in inflation would ease the Fed’s burden of controlling prices and bring some relief to a stock market that has been under near-constant pressure in 2022. The core CPI, which removes the influence in food and energy prices, also beat expectations (at 6.0% year-over-year), but showed a slight slowdown from the previous reading.
Those numbers convinced investors on Friday that the Fed has a long and difficult road ahead as it tries to stabilize prices without plunging the economy into a recession. As a result, the S&P 500 (SPX) fell almost 3% on Friday, bringing the index’s weekly loss to over 5% and its year-to-date loss to 17.6%. Growth-oriented stocks have been particularly hard hit as they tend to be more sensitive to higher rates than their value counterparts. The Russell 1000 Growth lost 3.7% last Friday while the Russell 1000 Value lost just 2.3%. I expect the markets to be choppy this week at least until Wednesday’s FOMC statement and depending on the FOMC tea leaf reading, we could see more volatility to end the week.
Unlike Friday, the rest of the past week was rather calm and saw mixed developments on the economic front. Monday saw a better than expected reading on the US trade deficit, which was somewhat surprising given that the US dollar continues to strengthen against other major currencies. The improvement likely has more to do with ongoing shutdowns in China and unrest in parts of Europe than long-term trade trends, but it still bodes well for the upcoming GDP report. The closely watched 10-year US Treasury yield, however, rose above 3% for the first time since early May as investors remained nervous about interest rates and inflation. Speaking of 10-year yields, mortgage applications fell to a 22-year low on Tuesday, as the typical rate for a 30-year loan rose above 5% and stood at its highest level in more than a year. decade. Mortgage rates are influenced by the 10-year Treasury rate.
Energy prices continued to rise last week with crude oil prices surging above $120 a barrel. The national average price of a gallon of gasoline thus reached $5 per gallon and increased the pressure on consumers. On Thursday, the employment numbers turned relatively strong and it is clear that the US labor market remains strong. In fact, continuing jobless claims remain at their lowest level since 1969. Unfortunately, the strength in the labor market is not helping the Fed fight inflation, and we are likely to see weaker employment numbers. before prices are brought under control.
This week’s slate of economic data will be clearly highlighted by the FOMC statement and press conference on Wednesday and investors should expect markets to remain choppy throughout the week, especially before and after. President Powell’s press conference.
|Monday 06/13/2022||New York Fed 1- and 3-year inflation expectations (May)||3.9% / 6.3%|
|tuesday 06/14/2022||NFIB Small Business Index (May)||93.2||93.0|
|Producer Price Index (May)||0.5%||0.8%|
|Wednesday 06/15/2022||FOMC statement and press conference||–||–|
|Retail sales (May)||0.9%||0.2%|
|Import Price Index (May)||0.0%||1.2%|
|NAHB Home Builders Index (June)||69||68|
|Thursday 06/16/2022||Initial unemployment insurance claims (June 11)||219,000||229,000|
|Continuing unemployment insurance claims (June 4)||1.31M||–|
|Philadelphia Fed Manufacturing Index (June)||2.6||7.0|
|friday 06/17/2022||Industrial production (May)||1.1%||0.4%|
|Capacity Utilization (May)||79.0%||79.3%|
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