Hey Folks, markets took another turn lower this week with the inflation reading coming in higher than the prior peak in March. This suggests we have not reached peak inflation yet and price action reacted accordingly. Get my take on what this means for market price action in this Week’s Round-Up.
WEEKLY SOUND BITES:
The major indexes finished with steep losses despite some early-week strength. The equities market turned south on Thursday afternoon, and the selling accelerated on Friday following the release of hotter-than-expected consumer price index (CPI) data for May. In the latest sign of major retailers struggling with mismatches of supply and demand, Target guided profit estimates lower on Tuesday for the second time in three weeks.
The May CPI release was the focus of the week’s economic data. The report showed that headline inflation was 8.6% from a year earlier, topping consensus estimates. May’s headline CPI was also higher than April’s 8.3% reading, disappointing investors who had been looking for price increases to slow. Core CPI, which excludes food and energy, climbed 6% from a year ago, also faster than consensus estimates. In a sign that the labor market may be loosening, weekly initial jobless claims increased and hit their highest level since January. And if this was not enough, The University of Michigan’s consumer confidence survey showed the most downbeat sentiment on record…
The acceleration in headline inflation is keeping pressure on the Feds to raise rates aggressively and leading to anticipation of more hikes of 50 basis points each—rather than 25—into the second half of the year. The next Fed policy meeting is June 14‒15. U.S. Treasury yields also increased, with yields on short- and intermediate-term maturities climbing sharply after the CPI release. Hawkish policy signals from the European Central Bank and soft demand for the Treasury Department’s sale of new 10-year notes helped drive U.S. government debt yields higher. The futures market was also looking for two additional quarter-point boosts in early 2023, bringing the Fed’s key policy rate target to a peak of 3.5% to 3.75%.
European shares fell sharply after the European Central Bank (ECB) suggested that it may increase interest rates at a faster-than-expected pace after July. The ECB signaled that it plans to start raising its key deposit rate, which stands at -0.5% currently, by a quarter point in July to contain record inflation. However, the central bank added: “If the medium-term inflation outlook persists or deteriorates, a larger increment will be appropriate at the September meeting.” The ECB also confirmed it would end net purchases of bonds under its asset-buying program on July 1. The ECB called for the economy to expand 2.8% this year, down from its previous forecast of 3.7%. The central bank’s projections show economic growth slowing to 2.1% in 2023 and 2024.
Japan’s reopening to tourism provided a boost to their markets. Japan’s economic growth still below pre-pandemic levels so the BoJ will extend its support for economic activity by continuing with current monetary easing.
Stocks in China also rallied amid hopes for looser monetary policy and signs that Beijing was easing its years long crackdown on the technology sector. Exports grew at a double-digit pace and imports expanded for the first time in three months in May, as factories reopened, and supply chain issues improved.
Enjoy This Week’s Round-Up
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