Weekly Market Update: May 22, 2023
The April price data showed inflation is moderating. Following an on-trend Consumer Price Index reading, producer (wholesale) price growth also eased last month. Specifically, the Producer Price Index (PPI) rose 0.2% in April and was up just 2.3% over the last 12 months. The latter figure was only modestly above the Federal Reserve’s target rate of 2.0%, amounting to an encouraging sign for the central bank in its battle to tame inflation. Investors should note that another round of inflation data (May reports) will come before the next Federal Open Market Committee (FOMC) meeting in mid-June.
More benign price data may give the central bank the opportunity to pause on the interest-rate front. Further increases, after raising the federal funds rate by five full percentage points in a little over a year, would put pressure on the housing industry, the banking system, and the commercial real estate business. The consumer sector has proven resilient, but with pandemic-era savings eroding more consumers are paying credit cards late according to the New York Fed, while balances grow. Pressure on consumer spending will likely follow.
The economy is slowing, with both manufacturing and residential construction activity weakening. It also is worth noting that initial weekly jobless claims have spiked this month, which suggests that the Fed’s efforts to slow job growth are starting to gain traction. This would not be good for consumer spending and would add to the growing worries about the U.S. economy. On point, April retail sales rose 0.4%, which was half the consen- sus forecast, and home improvement giant Home Depot (HD) lowered its full-year prognostications.
First-quarter earnings season proved better than most expected. With more than 90% of S&P 500 companies reporting, nearly 80% posted positive earnings surprises. Still, S&P 500 earnings are estimated to have fallen 2.5%, which would mark the second consecutive quarterly decline. The next few quarters may be weak too, as the consumer feels the full effects of higher borrowing costs.
Conclusion: The stock market has traded in a tight band recently, getting some support from better-than-anticipated corporate results. However, given the ongoing economic and Federal Reserve uncertainty, a pickup in volatility can’t be ruled out in the near term.