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The final full week of May was dominated by debt ceiling drama. Early last the week, Treasury Secretary Janet Yellen reiterated her warning that the government could run out of money as early as June 1. However, by Thursday, it was revealed that there would be sufficient funds to avoid a default until June 5. Still, there was optimism from both sides of the political aisle that a deal would be done before a default could occur.
On Friday, President Joe Biden said bluntly that there would be no default while conservative lawmakers also said that progress was being made to avoid that fate. It was estimated that the stock market could lose up to 45 percent of its value if a protracted default were to occur. The threat of a default alone caused short-term bond yields to hit 7 percent, and it was also suggested that even a relatively short technical default could cause interest rates on mortgages, credit cards and other loans to increase by 2 percent or more.
Analysts also believe that a default of any kind could lead to the loss of millions of jobs and push the economy into a recession. Regardless, there is still a consensus among economists that a recession is likely in the second half of the year thanks to the Fed’s rapid increase of funds rate to 5.25 percent.
News released this week suggests that the Fed may not be done raising interest rates in the short or long-term. Markets had priced in the prospect of a summer pause in rate hikes while the Fed got a better idea of the impact that existing actions had on the economy. However, on Thursday, it was revealed that the economy had grown 1.3 percent in the first quarter as opposed to an expected increase of just 1.1 percent.
Furthermore, there were only 229,000 unemployment claims compared to a forecast of 249,000. This suggests a labor market that is still tight instead of one that is showing the type of weakness that would ease inflationary pressures. On Friday, the Core PCE Price Index revealed a .4 percent increase during the month of April, which was higher than the .3 percent forecast.
Meanwhile, durable goods orders increased 1.1 percent while core durable goods orders dropped by .2 percent over the past month. Friday saw the release of the revised UofM consumer inflation expectations figure. Consumers now expect inflation to be at 4.2 percent within the next 12 months, which is lower than the 4.9 percent CPI figure released on May 10.
Investors this week were mostly cautious in the runup to the Memorial Day holiday. The S&P 500 started the week at 4,202 and finished the week at 4,505, which was a .35 percent gain during that period. The Dow 30 started the week at 33,415 and ended the week down .85 percent at 33,093. The NASDAQ finished the week up 2.55 percent at 12,975 and was buoyed by a strong Friday that saw the index gain 277 points.
Gold prices continued their May slump falling to a low of $1,936 per ounce on Thursday evening. The price of gold started the month at $2,075 per ounce.
There is going to be a significant amount of news released next week after investors get back from the long holiday weekend. On Tuesday, the Confidence Board (CB) Consumer Confidence report is scheduled to be released at 10 a.m. On Wednesday, the JOLTS report will be issued while unemployment and manufacturing data is scheduled to be released on Thursday.
On Friday, nonfarm employment change data will be released in addition to the unemployment rate. Average hourly earnings data for the previous month will also be released, which may shed some light on what the Fed might do next about inflation.
Last week started with some important news as the Empire State Manufacturing Index was released on Monday morning. In April, the index came in at -31.8, which represents a major contraction in New York’s manufacturing sector. This is important as a slump there generally indicates a slowdown in other parts of the country. Although analysts anticipated a negative figure, they foresaw only a modest contraction of 3.7.
On Tuesday, both retail sales and core retail sales figures for the past month were released. In April, retail sales and core retail sales were up .4 percent on a month-over-month basis. This was lower than the forecasted .8 percent increase for retail sales and a .5 percent increase for core retail sales. However, the actual numbers were still higher than a month ago when retail sales figures dropped .7 percent and core retail sales figures dropped .5 percent.
Following a quiet news day on Wednesday, Thursday began with unemployment claim data from the previous week. Over the last seven days, there were a total of 242,000 new claims, which was down from 264,000 the week before and lower than the forecast of 253,000 claims.
When combined with strong retail sales figures, the drop in unemployment claims may indicate that the economy is still hot. This may indicate that the Fed might have to rethink its intent to potentially keep rates where they are at the June Federal Open Market Committee (FOMC) meeting. Several voting members have said that recent data has indicated a need to at least consider another rate hike in June or have expressed a desire to continue hiking rates in general.
On Friday, Fed Chair Jerome Powell gave prepared remarks as to the future of Fed policy. During those remarks, he stated that he was open to the idea of a pause as he felt that interest rates were sufficiently high enough to restrict growth. A temporary pause would give policymakers time to determine whether further hikes were necessary or if existing efforts to reign in the economy were having their intended effect.
Powell also said that issues with Silicon Valley Bank (SVB) and other smaller financial institutions may enable the Fed to keep interest rates where they are. This is because trouble in the banking sector may lead to tougher lending standards, which would create conditions that are less favorable for economic growth.
However, Powell stressed that it was unclear as to whether current trouble in the banking sector would lead to long-term issues. He did say that there were many key differences between the current situation and the one that caused the recession of 2008.
Markets responded strongly to Powell’s remarks as the S&P 500 went from its Friday high of 4212 just before 11 a.m. to its low of 4180 just 30 minutes later. The Dow also reached its Friday high just prior to Powell’s remarks when it hit 33,650. As with the S&P 500, the Dow plunged to its daily low of 33,353 while Powell was talking.
The NASDAQ began Friday at its high of the day of 12,714 before slowing falling to 12,634 by midday. Despite its losses on Friday, the NASDAQ would finish the week up 2.82 percent. The S&P 500 would finish the week about 1.5 percent higher, while the Dow would finish the week up .32 percent.
Other markets such as gold and oil were also impacted by Powell’s comments. Gold was hovering near daily and weekly lows on Friday before finishing the week at $1,983 per ounce. Oil was at a weekly high of $73.48 at 9 a.m. before plummeting throughout the day to finish the week at $71.02.
There will be a number of important news events this week as the FOMC meeting minutes are scheduled to be released on Wednesday. Flash manufacturing and services data is scheduled to be released on Tuesday morning while quarterly gross domestic product (GDP) figures will be announced on Thursday. Finally, Friday sees the release of monthly durable goods and PCE price index figures.