- The equity markets had a mixed week with the Nasdaq outperforming due to a surge from Alphabet’s new AI-based search platform while financial stocks underperformed.
- The Fed’s quarterly Senior Loan Officer Opinion survey reported tightening lending standards and weaker demand for commercial and industrial loans due to a less favorable economic outlook and lower loan-to-value ratios.
- Consumer inflation rose 0.4% in April and 4.9% over the past 12 months, well above the Fed’s target of 2%. Producer prices rose 0.2% in April, and core PPI rose 0.2% for the second month.1
- Jobless claims increased to 264,000, the highest level since October 2021, while consumer sentiment tumbled to a six-month low of 57.7 in May, with expectations of higher inflation in the long-term.
Outside of inflation data, the economic calendar was relatively light. The major equity indexes ended last week in a mixed state, with the technology-heavy Nasdaq index outperforming all others. This was largely due to a surge from Alphabet, following the release of its new artificial intelligence-based search platform. Financial stocks underperformed and were pushed lower over regional bank concerns. The TSX slipped lower on the week, with oil dropping 1.7%. The European equity indexes finished mixed due to fears of additional central bank rate increases.
In a sign that economic activity is slowing, the Fed’s quarterly Senior Loan Officer Opinion survey reported on Monday that, “[r]egarding loans to businesses, survey respondents reported, on balance, tighter standards and weaker demand for commercial and industrial (C&I) loans to large and middle-market firms as well as small firms over the first quarter. Meanwhile, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories,” including residential loans, home equity loans, all consumer loan categories and auto loans. Credit lending remained unchanged. The report continues that tightening lending standards is a response to wider spreads of loan rates and the cost of capital and lower loan-to-value ratios. Additionally, banks cited less favorable or uncertain economic outlooks, reduced risk tolerance and deterioration of collateral values.2
On Wednesday, the U.S. Labor Department reported that CPI for April rose 0.4% compared to a 0.1% increase in March. Over the last 12 months, consumer inflation rose 4.9% compared to 5% for March. The core inflation rate, excluding energy and food, rose 0.4% for the second month, and year-to-date increased by 5.5%. For April, food was flat, energy was up 0.6% and shelter gained 0.4%. To date, used cars and trucks are down 6.6% but rose 4.4% in April. While the recent inflation numbers are down substantially from last year, the latest inflation reading is well above the Fed’s target of 2%.3
On Thursday, The Labor Department reported that the Producer Price Index rose 0.2% in April and, over the last 12 months, gained 2.3%. The latest reading is the lowest since January 2021. In the core PPI, excluding food, energy and trade services, producer prices rose 0.2% after a 0.1% rise in March. For the 12 months ending April, the core PPI rose at a 3.4% rate, the lowest in two years – down from 3.7% in March3. Also on Thursday, the Labor Department reported initial unemployment jobless claims jumped to 264,000, a 22,000 increase over the previous week and the highest level since October 2021. In addition, continuing claims for all benefit programs, for the week ending April 22, decreased by 63,903 to 1,715,353. The U.S. Fed officials want to see more slack in the labor market to reduce upward pressure on wages4.
On Friday, the University of Michigan reported that preliminary consumer sentiment tumbled to a six-month low of 57.7 from the reading in April of 63.5. The Current Economic Conditions survey fell to 64.5 from 68.2, and the Index of Consumer Expectations fell to 53.4 from 60.5. Inflation expectations one-year-out eased slightly to 4.5% from 4.6% in April, but the long-range expectations rose to 3.2% from 3.0% in the previous month5
Equity markets struggled over the last couple of weeks, as investors digested the latest earnings and guidance reports. Valuations are stretched in selected issues, while others are more reasonably priced, causing many to believe markets could push higher entering the summer months. The banking sector, credit conditions, the U.S. debt ceiling debate and the U.S. Fed interest rate policy will continue to play on investor sentiment.
Sources:
1https://www.bls.gov/news.release/cpi.nr0.htm
2https://www.federalreserve.gov/data/sloos/sloos-202304.htm
3https://www.bls.gov/news.release/cpi.nr0.htm
4https://www.bls.gov/news.release/ppi.nr0.htm
5https://www.dol.gov/ui/data.pdf
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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