Market Perspective for May 30, 2023

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.

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