Hello, this is Claire Ellerhorst, Senior Portfolio Manager at Fifth Third Bank with this week’s Economic Beat.
Major U.S. equity indices dropped sharply last week, after piping hot inflation data raised recession fears. The benchmark S&P 500 Index dropped 5.0% in total return and is now down 17.6% year-to-date. The Nasdaq Composite dropped 5.6% and the Dow Jones Industrial Average fell 4.6% for the week. Yields surged, with the 10-year U.S. Treasury yield up 23 basis points for the week to end at 3.16%. The U.S. dollar continued to strengthen versus major peers and oil was higher for the week.
Friday’s consumer price index (CPI) report prompted a deep selloff, as faster-than-expected inflation reignited concerns about aggressive Federal Reserve (Fed) action and the potential for recession. Headline CPI rose 1.0% in the month of May, higher than estimates for a 0.7% reading. Year-over-year, CPI was up 8.6%, faster than the 8.3% pace in April. The core measures also came in slightly ahead of expectations, though much of the headline beat was driven by volatile gas and food prices. The report sparked speculation that the Fed would have to raise interest rates even more aggressively in the coming months and slashed hopes that inflation may have peaked in the spring. At Fifth Third, we note that if the Fed can continue to hold inflation expectations reasonably "anchored," our central bank should have more leeway by next year to balance price stability with continued economic growth.
In the week ahead, the Federal Reserve’s Federal Open Market Committee meets to set monetary policy. Expectations are for another 50-basis point rate hike to the Fed funds rate, amid unrelenting inflationary pressures. Market participants will be watching for guidance on the path for rates ahead, particularly what rate hikes may look like at the July and September meetings. The June meeting announcement comes Wednesday afternoon. The Bank of England and Bank of Japan also set rates this week. The U.S. economic calendar brings small business optimism, retail sales and housing data.
As always, we’ll be watching and reporting back to you. Thank you.