U.S. and International Equities
U.S. Markets Finish Lower
The U.S. major market indexes finished lower for the third straight week. This week’s hawkish stance taken by central banks globally challenged market sentiment. Investors remain quite concerned about the possibility of a recession amid stubbornly high inflation and tightening monetary policy. In addition, softer economic data and bearish c-suite economic expectations have investors anticipating more Q2 earnings pre-announcements to the downside. We continue to keep a close eye on Chinese lockdowns as that nation’s measures could directly affect global supply chains, which could influence the direction on inflation.
Developed international stocks (MSCI EAFE) finished the week lower as the European Central Bank faces a challenging balance in combating inflation while aiding highly indebted euro nations coping with higher interest rates. Emerging markets (MSCI EM) finished lower as COVID-19 conditions continued to slightly improve in China earlier this week. The situation remains delicate given the spread of the virus and China’s aggressive COVID measures.
Fixed Income Lost Ground
The Bloomberg Aggregate Bond Index finished lower for the third straight week as the 10-year U.S Treasury bond yield increased to over 3.2%. High-yield corporate bonds, as tracked by the Bloomberg High Yield index, finished lower, reversing two consecutive weeks of gains, and remains negative for the year. Monetary policy continues to affect the performance of fixed income, which has seen its worst start in at least 50 years.
Crude oil and natural gas pulled back this week despite lower supply stockpiles worldwide. Given the run both commodities have seen this year, a pullback could be seen as in the cards. That being said, fundamentals appear to remain positive for energy investors. Amid strong demand headed into the summer travel season, gasoline inventories presently stand at an eight year low. Meanwhile gold had a lackluster week in the wake of this week’s FOMC meeting.
Economic Weekly Roundup
The Federal Reserve concluded its two day policy meeting Wednesday and announced that it was raising its benchmark rate by 0.75% to a range of 1.5 – 1.75%. This was the first 0.75% move since November 1994. The possibility of a 0.75% hike seemed far-fetched a week ago, however an upside surprise in the latest reading of Consumer Price Index (CPI) index inflation from last Friday changed everything as short-term yields soared and market-implied rate hike expectations climbed higher. New projections saw the median expectation for 2022 growth pulled down to 1.7%, compared to 2.8% in March, and the year-end policy rate expectation increased to 3.4%, up from 1.9% in March. Our base case is that these projections don’t fit together well unless the Fed gets a very friendly economic environment. In order for this to happen, supply chains need to improve with more workers entering the job market.
May Retail Sales
May retail and food spending posted a decline of 0.3% month over month, which was below economists’ expectations. Retail sales were well-below the pace in April. They posted a downwardly revised 0.7% increase from the initial 0.9% estimate. On a yearly basis, May retail sales increased over 8% as spending, combined with higher prices, has put a floor under the sales numbers. The negative effects of inflation on the pocketbooks of consumers does appear to be affecting spending. This mirrors negative guidance provided by some major retailers.
Weekly Employment Report
Initial claims for unemployment insurance for the latest week came in lower than the prior week but missed economists’ expectations. The readings remain historically low despite the recent uptick. Continuing claims, which remain near record lows, increased from the prior week and met economists’ consensus estimate. The data continues to illustrate a very tight labor market, a culprit of the present inflationary climate.
The following economic data and potentially market-moving events are slated for the week ahead:
- Tuesday: Existing Home Sales (May)
- Thursday: Weekly Initial and Continuing Unemployment Claims, Markit PMI composite (June), Markit PMI manufacturing (June)
- Friday: University of Michigan sentiment (June), New Home Sales (May)
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