Weekly Market Update: May 15, 2023
The nation created 253,000 jobs in April. That figure was well above the consensus forecast of 180,000 nonfarm payroll positions and was accompanied by a drop in the unemployment rate from 3.5% to 3.4%. The average U.S. hourly wage rose 0.5% last month and was up 4.5% for the 12-month period. Both those figures exceeded expectations, suggesting continued labor market inflation.
The April report on consumer prices also showed inflation remains sticky. The Consumer Price Index (CPI) and the core CPI, which excludes the food and energy components, both rose 0.4%. On a 12-month basis, the CPI and core CPI increased 4.9% and 5.5%, respectively. These figures were in line with the consensus expectations, but were still running well above the central bank’s target of 2.0%.
These two reports would normally give the Federal Reserve the green light to raise the benchmark short-term interest rate. However, the Fed must now guard against overtightening the monetary reins and putting additional pressure on the U.S. banking system. The higher lending rate environment has led to a decrease in new loans and a drop in customer deposits as customers seek higher returns outside their banks. This caused a liquidity crunch at a number of regional banks and their subsequent failures.
An interest-rate pause at the June Federal Open Market Committee (FOMC) meeting seems plausible. This would allow the Fed to further assess what impact raising the federal funds rate by five full percentage points, to 5.00%-5.25%, is having on the economy. In its May statement, the Fed removed the phrase “The Committee anticipates that some additional policy firming may be appropriate.” Instead, it will look to determine “the extent to which additional policy firming may be appropriate.” This opened the door for a pause next month.
Conclusion: The strong labor data and a better-than-expected first-quarter earnings season have provided support for equities, as they suggest an anticipated recession later this year may be mild and short-lived. That said, with the stock market pricing in interest-rate cuts by this fall and the Fed giving no such indications, we think this uncertainty, along with ongoing inflationary pressures and a fast-approaching debt ceiling deadline on Capitol Hill, will make for some near-term volatility. Thus, continued caution appears warranted.