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Market Perspective for May 22, 2023
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.
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Investors and traders alike spent the week interpreting several economic data released over the past week. The first two days of the week featured mostly range bound markets as there were no major news releases. Instead, equities, currencies and commodities were stuck in neutral in anticipation of April’s Consumer Price Index (CPI) data.
The April year-over-year CPI figure came in at 4.9 percent, which is the lowest number since June 2021 when the CPI figure was 5 percent. This was slightly lower than what analysts expected, as it was believed that yearly inflation would be 5 percent. In addition, the Bureau of Labor Statistics (BLS) also released the monthly CPI figure for April, which was .4 percent and in line with analyst estimates. Core CPI was also at .4 percent, which was slightly higher than the .3 percent estimate prior to the release of that data.
On Thursday, the monthly Producer Price Index (PPI) and the Core PPI reports were released. Core PPI for April came in at .2 percent while analysts expected that the PPI figure would remain flat when compared to March. The traditional PPI figure was also at .2 percent, which beat expectations of a drop of .2 percent compared to the previous month. Unemployment claims data was also released on Thursday, which showed that there were 264,000 requests for unemployment assistance over the previous week. That figure was also higher than the projected 242,000 claims prior to the report’s release.
On Friday, the University of Michigan released its preliminary consumer sentiment and inflation expectation data. In April, consumer sentiment dropped to 57.7 from 63.5 while respondents believe that inflation will be at 4.5 percent in the next 12 months.
The Dow made its high of the week on Monday morning reaching 33,729 before grinding down to 33,300 by the end of the week. The S&P 500 was range bound for the entire week and would establish its weekly high and low on Wednesday. On that day, the S&P 500 would bottom out at 4,102 and peak at 4,142. It would finish the week at 4,124, which was roughly where it opened on Monday. Finally, the NASDAQ would begin the week at its lowest point at 12,190 before grinding to its high of 12,359 on Friday morning.
The major indexes were largely quiet this week in part because traders aren’t sure how recent data releases might impact the Fed’s interest rate decisions. The Federal Open Market Committee (FOMC) is scheduled to meet again in June, and there are expectations that interest rates will be allowed to remain where they are. Currently, the Fed funds rate is between 5.25 and 5.5 percent, and there is significant debate as to whether this is sufficient to bring down inflation.
Wall Street has spent most of the year hoping for an indication that the Fed is ready to pivot and start cutting interest rates. This is because higher interest rates make it harder for companies to borrow money, which can make it harder to access the capital businesses need to grow. Furthermore, higher interest rates tend to weigh on consumer spending, which can hinder earnings growth.
A fight over the debt ceiling may also have caused traders to be cautious with their money this week. Treasury Secretary Janet Yellen announced this week that a default could occur as soon as June 1 if there was no deal in place to increase the government’s capacity to borrow money. It’s believed that a default could trigger a significant recession that could result in millions of job losses. This may be true even if a default is seen as strategic and only lasts for a relatively short period of time.
Investors may get more clarity next week as manufacturing and retail sales reports are set to be released. Next Friday, Fed Chair Jerome Powell is expected to speak, which may provide more insight into what the Fed might do at next month’s meeting and beyond.