Investors’ fears of an impending recession and whether the Central Bank can orchestrate a soft landing came to the forefront last week. All major equity indices ended the week in negative territory, along with bond rates ending the week higher. (As interest rates on bonds move higher, bond prices move down). The Dow Jones lost 0.94% by week’s end, the S&P 500 fell 1.17%, and the Nasdaq dropped 0.98%. The S&P 400 MidCap index lost 0.74%, and the Russell 2000 index held up, losing 0.21% in the week. The TSX gained 0.2% with energy support, with oil gaining 4.5%.
Investors in Europe were worried about slowing economic growth and inflation, comments by the European Chief Economist Philip Lane concerning the Central Bank’s asset purchases and the pace of Central Bank policy tightening. Since 2014, the ECB key deposit rate has been a negative 0.5%. In Europe, the pan-European STOXX Europe 600 Index declined 0.87%, with most of the major indices losing ground in the week. Germany’s DAX was almost flat, the French CAC fell 0.47%, and Italy’s FTSE MIB Index lost 1.91%. The UK’s FTSE gave up 0.69% during the holiday-shortened week.
Economic news of the week kicked off with the Conference Board reporting the Consumer Confidence Index in its latest survey dropped in May to 106.4 from April’s 108.6. Based on consumers’ views of business and market conditions, the Present Situation Index also declined to 149.6 from April’s 152.9 reading. Based on shorter-term views for income, business and the labor market, the Expectations Index also fell to 77.5 in May from 79.0 in April. As noted in other consumer surveys, purchases for cars, homes and more durable goods all slowed in the month and shifted to services. Vacation plans slowed in the month as fuel, food and accommodations registered higher prices.1
In contrast to other areas, the Chicago Purchasing Managers’ Index (PMI) rose to 60.3 in May from 56.4 in April.2 On Wednesday, the Institute for Supply and Management PMI, an index of manufacturing activity, rose 56.1% in May versus the April reading of 55.4%. Demand is holding up, and all six largest manufacturing industries reported moderate to strong growth in the month.3
On Wednesday, the Labor Department reported that US job openings fell from the recent high to 11.4 million jobs from April’s 11.9. People quitting jobs remained stable at 4.4 million, considered high compared to 3 million before the pandemic. There are an estimated two jobs for every unemployed person. The number of job openings fell the most in health care and social services (-266,000), retail (-162,000) and restaurants (-113,000); the largest increases were in transportation, warehousing and utilities (+97,000), non-durable goods manufacturing (+67,000) and durable goods manufacturing (+53,000). The labor market’s persistent tightness is the one data point the Federal Reserve can point to as they raise rates to rein in inflation.4
On Thursday, the ADP National Employment Report released private payrolls grew by just 128,000 in May compared to economists polled by the Wall Street Journal forecasting a gain of 299,000. The big loser in the report was the small business category, losing 91,000 workers, while large businesses added 122,000, and mid-size companies (those employing 50 to 499 workers) added 97,000. The services sectored added 104,000, with leisure and hospitality adding 17,000. Manufacturing and goods producers added 24,000 and 22,000 respectively.5 It is important to note that the ADP reading can vary significantly from the US Department of Labor report expected to be produced later this month.
On Thursday, the Labor Department’s initial claims report showed a decrease of 11,000 to 200,000, one of the lowest layoff readings on record. Total claims for all benefit programs increased slightly by 2,113 to 1,319,297. The latest reading compares to 15,456,735 for the same week in 2021.6 On Friday, US factory orders increased by 0.3% while economists polled by the Wall Street Journal had forecasted a 0.6% gain. Durable goods orders for big-ticket items such as machines, cars and electronics remain strong from the pent-up demand of the last two years.7 Also, on Friday, the ISM reported the latest barometer of business conditions for service sector companies, including banks, hospitals and retailers. The newest reading declined 1.2 points to 55.9 in May compared to 57.1 in April.8
Except for the labor market, virtually all sectors of the economy are showing initial signs of deterioration from record growth rates as the economy slows with higher rates. This will likely create more volatility in the coming months as investors’ sentiment ebbs and flows with each news release. Despite the recent one-week rally, as this week illustrated, we are far from out of the woods and should remain cautious.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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