Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
U.S. equity markets rallied on Friday but declined for the week, driven by concerns about inflation and the prospect of more aggressive tightening by the U.S. Federal Reserve (Fed). The Dow Jones Industrial Average recorded its seventh consecutive weekly loss, while the S&P 500 notched its sixth weekly loss in a row. For the week, the Dow fell 2.1%, the S&P 500 declined 2.4%, and the Nasdaq Composite shed 2.8%. The yield on the 10-Year U.S. Treasury fell for the week, settling at 2.93%, reversing the downward trend in the bond prices over recent months as investors sought safety in U.S. Treasuries. West Texas Intermediate crude oil prices fell early in the week, briefly falling below $100 per barrel on Tuesday, then rose in the second half of the week to close at $110 a barrel, up 0.7% for the week. Gold finished the week down 4.0% to $1,810/ounce.
The bearish case for global equities was unchanged last week, with a focus around Fed-led global monetary tightening, more-persistent inflation than expected, China Covid-19 lockdowns, geopolitics, a global growth slowdown, and extended valuations. During the midweek selloff, the S&P 500 hit the lowest point since March 2021 and the Nasdaq Composite hit its lowest since November 2020. A Friday rebound pulled stocks off their mid-week lows, though the S&P 500 still finished down for a sixth-straight week, the first such streak since 2011. The bullish case for global equities continued to revolve around oversold conditions, overly negative sentiment, peak-Fed hawkishness, and peak-inflation, though those dynamics didn't get gain much overall traction despite Friday's rally.
The hope last week was that the release of the domestic consumer price index (CPI) would show a slowdown in inflation. While the April CPI ticked down from March, potentially signaling a peak, both the annual and monthly pace of increases surprised to the upside, confirming the need for the Fed to stay hawkish. Headline CPI increased 8.3% in April, down from 8.5% in March. Core CPI, which excludes food and energy, increased 6.2% in April, down from 6.5% in March. The attention, though, was on the 0.6% monthly gain in the core index, which was the largest increase in three months. Among categories that stood out, rents climbed 0.6%, and airline fares surged 18.6%, as travel demand rebounded strongly. Goods inflation moderated, as used-car prices declined for the third consecutive month, and prices for clothing and appliances fell. With consumer spending rotating back to services from goods, it is possible to expect further easing in goods pricing the months ahead. However, given the continued elevated level of overall inflation domestically, it continues to be extremely likely that the Fed raises short-term interest rates significantly at their next two meetings.
In the week ahead, investor’s will be busy as eyes turn toward the latest housing market updates with April figures for U.S. housing starts and existing home sales on Wednesday and Thursday, respectively. The latest Consumer Price Index (CPI) inflation figures for the Eurozone, U.K., and Canada will be released this week, providing an indication of whether or not global inflation rates have peaked. Investors will also be expecting the U.S. Census Bureau’s report on retail sales for the month of April and earnings from a number of major retailers, including Walmart, Target, Home Depot, and Lowe’s.
As always, we will be watching and reporting to you next week. Thank you.
