Hello, this is Tom Jalics, Chief Investment Strategist at Fifth Third Bank
The major US equity indices were mixed this week. The S&P 500 was down 0.2% for the week. The Nasdaq Composite closed the week up 0.4% and the Dow Jones Industrial Average was down 1.0% for the week. U.S. Treasury yields moved modestly higher last week with the 10-year U.S. Treasury note ending the week at 3.45% and the 2-year U.S. Treasury note ending the week at 3.99%. The 2-year/10-year U.S. Treasury yield curve remained inverted, finishing the week 54 basis points inverted. The U.S. dollar index was up 1.4% for the week versus a basket of global currencies. Gold finished the week 0.1% lower, ending the week at $2,014/ounce. West Texas Intermediate (WTI) crude oil fell by 1.4% for the week, ending the week at $70.33/barrel.
Inflation and the U.S. debt ceiling debate were on investors’ minds last week. The consumer price index (CPI) for April came in at 4.9%, better than the 5.0% expected. This was the smallest annual increase since April 2021 and the 10th straight month of improvement since inflation peaked last June at 9.1%. Excluding food and energy, core inflation ticked down to 5.5% from 5.6%. Encouragingly, core services inflation excluding shelter (which is largely a function of the labor market), improved meaningfully, rising by the slowest pace in nine months. The rise in jobless claims over the past month to a one-year high suggests that the labor-market tightness is starting to ease, which should help cool wage growth. Our view remains that we are well past the peak of inflation but that it remains far above the Federal Reserve’s goal. It is likely that the Fed will hold off on future interest rate increases in the near-term but keep interest rates at current levels over the next several FOMC meetings to monitor the improvement in the path of inflation going forward.
The debt ceiling was first instituted in 1917 and has been raised 20 times since 2001. It is an important but likely near-term and fleeting risk for financial markets. The existing debt ceiling was hit on January 19, and since then the Treasury has initiated extraordinary measures to continue to operate the U.S. government. These efforts are expected to be exhausted by June 1st. A meeting at the White House last Tuesday did not finish with a resolution. An additional meeting is set for this week. History suggests that there will likely be an eleventh-hour solution. The biggest risk is that political posturing leads to an extended time before a deal is secured, adding uncertainty and potentially much volatility to financial markets. The debt ceiling is a debate over the government’s willingness to pay its debt, not its ability to pay its debt. We do not believe the U.S. will default on its debt and that a bi-partisan resolution will be made as it has in all 20 times over the last 20 plus years.
This week brings us the last round of first quarter S&P 500 earnings reports, with updates from major retailers including Walmart, Target, Home Depot, and Alibaba, among others. The U.S. Census Bureau will report on April retail sales on Tuesday, providing a key update on consumer spending. Investor’s will digest updates on the housing market with the latest data on building permits, housing starts, existing home sales, and the NAHB’s Housing Market Index for May. Additional economic updates this week will include gross domestic product readings from Japan and the eurozone, and an inflation reading from Canada.
As always, we will be watching and reporting to you next week. Thank you.