Equities Due For A Bounce, But Cracks In The System Emerge
Equities had a rough week last week in spite of a Friday rally. Overall, most indices were down 1% or greater for the week. Language by the Fed has been interpreted as ambiguous, as Fed Chairman Powell seemed to leave a potential 75 basis point rate hike on the table. The market is currently pricing in a 50 basis point rate hike for the June meeting, the Fed is being vague about how far behind the curve they may be at the moment. There are multiple Fed speakers this week, including Mr. Powell, so their speeches will be heavily analyzed for clues.
Inflation numbers released last week do not yet show evidence that inflation has peaked. April's CPI number was slightly higher than expected, while the PPI number came in as expected.
On a year-over-year basis, there was a slight decline in April. We have seen this before with the data in December of 2020 and April of 2021. Perhaps if we get another YoY drop in the data next month we can begin to say that inflation has peaked. Until then, it seems to be a primary concern for investors. After a brief reprieve in gas prices in late April, the energy source has begun to move higher and has it a 10-year high.
U.S. consumers, especially in lower-income households are feeling the pinch of inflation and higher interest rates.
The Redbook year-over-year sales numbers dipped last week. While weekly data can moderate from time to time, the University of Michigan's Consumer Sentiment dipped to a 10-year low of 59.1 last week. It's possible that households that are feeling the pinch of inflation are utilizing more credit to deal with higher prices. Total Revolving Credit hit a multi-decade high last month, which is of concern should a recession occur within the coming months. The dislocation in the Labor Market, compounded with greater incurred debt would be a major problem for the economy.
Meanwhile, the supply chain situation is still a major concern. China's "Zero COVID" policy continues to baffle as there were only 239 new cases yesterday and only 6,100 active cases in the country of 1.4 billion people.
The number of anchored container ships waiting to be unloaded or loaded at the Shanghai port has nearly tripled in just a few short weeks. In addition, there is a shortage of baby formula and other items that has consumers' confidence levels on edge. Some good news this week on the retail front and positive language from the Fed could help ease volatility in the short-term.