Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
Major U.S. equity benchmarks finished mostly higher for the week. The S&P 500 gained 0.4%, the Nasdaq gained 1.9%, and the Russell 2000 rose 2.2%, while the Dow Jones Industrial Average declined by 0.8%. The U.S. 10-year treasury yield ended the week at 1.45%, down nearly 12 basis points after experiencing volatility throughout the week. Gold finished the week at $1,876/ounce, down 0.8% for the week. West Texas Intermediate Crude Oil ended the week at $70.81/barrel, up 1.7% for the week.
Inflation concerns drove investor conversation during the week. The widely anticipated U.S. Consumer Price Index (CPI), a measure of the average change over time in prices paid for a market basket of consumer goods and services, increased by 5.0% year-over-year, the largest increase since June 2008. Core prices were up 3.8% year-over year, the biggest increase since June 1992. Headline consumer prices rose 0.64% month over month in May, ahead of the 0.5% consensus. Core consumer prices increased 0.74% month over month in May, ahead of the 0.5% consensus. About 52% of the month-over-month increases were in six categories including used cars, rental cars, vehicle insurance, lodging, airfares, and food away from home. The Federal Reserve Bank is targeting inflation that averages 2.0% over time, before it begins to raise short-term interest rates to curb inflation. While recent data suggest that consumer prices are rising, the central bank has noted on multiple occasions that it believes recent readings are "transitory" or short-term in nature due to a combination of a sharp pick-up in demand as well as low inventory levels coming out of 2020’s recession. Financial markets appear to agree with this view for now as bond yields fell sharply, and most domestic equity indices enjoyed weekly gains. With U.S. labor markets far from full employment and the Fed’s willingness to tolerate increases in inflation related to "transitory" factors, current conditions support our view that short-term interest rates will remain low over the intermediate term.
In addition to inflation headlines, the domestic economic calendar last week included U.S. small business optimism that was weaker in May, the first decline in four months, driven by labor shortages and inflation concerns, according to the National Federation of Independent Business. Last week also saw the release of the Job Openings and Labor Turnover Survey (JOLTS), which rose to a record high in April of 9.3 million, an increase from the 8.3 million vacancies in March, as the labor market continues to heal.
In the week ahead, the June FOMC meeting is widely expected to be the highlight. Investors are looking for Fed Chair Powell to note that the Fed talked about the pace of asset purchases, but refrain from providing any formal thresholds surrounding the conditions it would like to see before starting to remove policy accommodation. The central bank is also widely expected to keep short-term rates at their current level of 0.00%-0.25%. Later in the week, producer price index data should give further insight into the state of inflation. The reading increased 0.6% and 1.0% in April and March, respectively. Retail Sales will be released and are expected to decline as much of the stimulus driven demand has been depleted. Housing starts are expected to increase after falling short last month due to rising raw material costs and supply-chain constraints. Finally, jobs data is expected to improve with the reopening of the economy and broad and successful vaccination effort.
As always, we will be watching and reporting to you next week. Thank you.