Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank.
Major U.S. equity benchmarks finished mostly lower for the week, despite a bounce back on Thursday and Friday. A continued pickup in attention on inflation and inflation expectations, and the potential that transitory factors may persist for longer put downward pressure on stock prices. Bond yields were up for the week, with the yield on the 10-year U.S. Treasury up 7 basis points, concluding the week at 1.63%. Gold finished the week at $1,843/ounce, up 0.4% for the week. West Texas Intermediate Crude Oil ended the week at $65.40/barrel, up 0.7% for the week.
Inflation headlines dominated the week and was the likely cause of equity market volatility. The Consumer Price Index increased 4.2% in April year-over-year, sparking inflation concerns from investors. The monthly increase was the largest since 2009. Excluding volatile components of the metric such as food and energy, core CPI rose 3.0% from a year earlier, up from 1.6% in March, and the highest since 1995. However, the reading may appear artificially high due to a pandemic related depressed reading in April of 2020. The Producer Price Index released Thursday heightened concerns for inflation with a 0.6% month-over-month increase. This was the largest increase in recorded data since 2010. However, the Federal Reserve remained unwavering in its conviction that the latest inflation data would be "transitory", and that the labor market, while healing, still has a long way to go to meet its goal of a broad-based and inclusive full employment level. Inflation readings are expected to remain elevated until late summer, given the depressed readings from a year ago. Transitory inflation readings and a still healing labor market should allow the Fed to remain dovish, keeping short term interest rates near zero for the next year, which will be a key to the continued rally in risk assets.
Last week was a busy one on the domestic economic calendar. In addition to the aforementioned inflation data, U.S. small business optimism rose to a five-month high, the third consecutive monthly increase. The tight labor market remained in focus with record JOLTS job openings in March and the latest NFIB Small Business Index noting record difficulty in filling jobs. Job openings reached a record level of 8.1 million jobs, but 44% of respondents reported that they were unable to fill open positions. Retail sales were flat in April after a major gain of 10.7% in the month prior. The total value of retail sales in April hit a record of $619.9 billion. Clothing stores had the largest decline, while restaurants and auto dealers saw an increase. April industrial production came in near expectations with an increase of 0.7%, but still below January’s levels. Capacity Utilization increased to 74.9%, but still below the pre-pandemic level of 76.9% in February of 2020.
In the week ahead, the economic calendar is busy with key releases from Empire Manufacturing data, Building Permits, Housing starts, Purchasing Managers’ Indices, and Existing Home Sales. Economists expect to see Building Permits decline month-over-month as the housing market calms. Existing home sales are expected to increase slightly due to similar market trends. Purchasing Manager’s indices are expected to remain at the same relative level as the month prior, still elevated and in expansionary levels.
As always, we’ll be watching and reporting back to you next week. Thank you.