Weekly Market Update: Mixed Market Reactions and Signs of Economic Slowdown Amidst Inflation Concerns

  • Mixed market performance driven by U.S. debt ceiling talks and NVIDIA’s strong earnings.
  • S&P and Nasdaq indices rose due to tech exposure, while Dow Jones and small to mid-cap markets declined.
  • Growth indices thrive with over 20% growth, while value returns experience a modest decline.
  • European markets faced downward pressure due to poor economic conditions and U.S. debt ceiling uncertainty.
  • Concerns of potential economic slowdown persist, with inflation remaining a persistent issue.

The U.S. debt ceiling negotiations and earnings from NVIDIA drove markets to finish the week mixed. After beating consensus earnings expectations by a wide margin, NVIDIA increased its profit outlook, providing investors with optimism and increasing the stock price by 24%. This resulted in the S&P and the Nasdaq indices up for the week. Tech exposure in the S&P 500 and the Nasdaq drove both markets higher, while the Dow Jones and the small to mid-cap markets slipped. Value returns have experienced a modest decline, while growth indices continue to thrive, with an impressive growth of over 20%. In Europe, the reality of the poor and worsening economic conditions and the uncertainty of the U.S. debt ceiling talks pushed all major markets lower in the week. 

On Tuesday, the S&P released the latest reading for its U.S. Composite Output, service and manufacturing indices. The Composite Index reached a 13-month high at 54.5 in May – up from April’s 53.4 – indicating an upturn in business activity. However, the data was skewed toward services, with the Service Business Activity Index rising to 55.1 versus 53.6 in April. In a sign of renewed sales contraction, the Manufacturing Output Index fell to 51.0 from 52.4 the previous month, and the Manufacturing PMI dropped to 48.5 from April’s 50.2. New export orders decreased further, and output charges with inflation continued rising at the slowest pace in three months. Employment growth remained solid.1 The U.S. Census Bureau and the Department of Housing and Urban Development reported on Tuesday that new home sales jumped 4.1% to an annualized rate of 683,000 in April. This latest jump in new, single-family homes resulted from a low supply of existing listings. Despite the jump in sales, the median new home price continued to sag, falling to $420,800 in April. The median home prices peaked at $496,800 in October of 2022 and, for the first time, are lower year-over-year for the first time since 2020. Sales in the south recovered from a sharp drop in the previous month, jumping by 17.8%. Inventory levels fell by 3.8% between March and April, equating to a 7.6-month supply.2  

On Thursday, the Labor Department reported initial unemployment claims increased by 4,000 from the previous week’s adjusted level of 229,000. It should be noted that Massachusetts amended claims for the first two weeks in May, contributing to the adjustment of the total claims for the previous week by 17,000. Continuing claims for all benefit programs ending May 6 dropped by 48,031 to 1,637,970.3  

 The data calendar on Friday was packed, starting with the Durable Goods orders up 1.1% versus the consensus view of down 0.8%. If we exclude transportation, new orders showed a slight decrease of 0.2%. However, when defense orders are also excluded, the decline is more significant at 0.6%. In April, shipments of manufactured goods decreased by 0.7%, unfilled orders increased by 0.8% and inventories of manufactured durable goods increased by 1%.4 Personal income rose in April by 0.4%, matching the 0.4% increase in March. Consumer spending increased by 0.8% following a meek 0.1% increase in March. This beat market expectations by 0.4%. The PCE (personal consumption expenditures) and the core PCE, which excludes both food and energy, rose 0.4%, bringing the annual number headline PCE to 4.4% and the core to 4.7%. Both the headline and the core PCE are up from March, reversing the declining trend over the previous two months.5 The Fed closely watches the PCE, and the reversal from the last couple of months may cause the Fed to consider raising rates at the next meeting.

Finally, on Friday, the final University of Michigan Consumer Sentiment Report reading for May came in at 59.2, down from April’s 63.5. The survey of Current Economic Conditions also fell to 64.9 in May from 68.3 in April, and the Index of Consumer Expectations fell to 55.4 from 60.5. The year-ahead inflation expectations slipped to 4.2% from 4.6% in April.6 

There is plenty of evidence of a potential economic slowdown, which would suggest that the interest rate policy of central banks is working. The problem is that inflation remains persistent, sticky and potentially a long way from the 2% long-run goal of the central banks. This week’s PCE and consumer spending will probably disappoint the Fed and will potentially lead to another rate increase at the next meeting. This would confirm the Fed’s drive for price stability. Meanwhile, the market is pricing in a rate cut later this year, which, if it does not take place, may prove detrimental to equity markets in the short term.








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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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