Hello, this is Claire Ellerhorst, Senior Portfolio Manager at Fifth Third Bank with this week’s Economic Beat.
Major U.S. equity indices posted solid gains last week, with the S&P 500 Index closing at a year-to-date high on Thursday and ending the week up 1.7% in total return. The Nasdaq Composite rose more than 3 percent and the Dow Jones Industrial Average rose half a percent in total return for the week. U.S. Treasury yields rose, with the 6-month U.S. Treasury moving well over 5 percent and the 10-year U.S. Treasury yield ending the week at 3.7%.
Investors were initially encouraged by reports of progress on debt ceiling discussions last week. Talks seemed to stall on Friday, when Republican negotiators walked out of White House talks, reigniting concerns over whether lawmakers will agree to a deal to avoid a default next month. Importantly, this is a debate over the government’s willingness to pay its debt, not its ability to pay its debt. History suggests this too shall pass and that the U.S. will not ultimately default on its debt. At Fifth Third, we are monitoring the situation closely. Political posturing and the delay of a deal will likely lead to financial market volatility in the near term.
Federal Reserve Chair Jerome Powell spoke on Friday, with the central banker striking a slightly less hawkish tone than recent comments from his colleagues. Powell said the risks of doing too much versus doing too little have become more balanced and reiterated that the Fed would be data dependent and cautious in future decisions. Futures markets suggested a roughly 20% chance of a rate hike at the June meeting following Powell’s comments.
In economic news, the release on retail sales showed spending rose 1.6% year-over-year in April. The 0.4% monthly gain was smaller than anticipated, reflecting a softening but still healthy U.S. consumer. Industrial production unexpectedly rose last month while capacity utilization, the extent to which the U.S. is using factory production capacity, rose in line with forecasts. Housing starts were surprisingly strong, rising 2.2% in the month of April. Building permits, a proxy for future construction, fell more than anticipated though permits for single family homes rose healthily.
More housing data will be released in the week ahead, including new and pending home sales. The economic calendar also brings a second estimate of U.S. economic growth for the first quarter, minutes from the Federal Reserve’s May policy meeting and April personal consumption expenditures.
As always, we’ll be watching and reporting back to you. Thank you.