- North American equity markets ended positively, driven by Fed expectations and potential debt ceiling resolution.
- European indices improved slightly, but concerns remained over high inflation.
- Job market showed mixed signals with increased job openings but stable hires and decreased separations.
- Market sentiment fluctuated, settling at a 60% probability of the next rate hike.
North American equity markets, except for the TSX, ended the week on a positive note, driven by optimistic expectations of the Federal Reserve pausing at the upcoming meeting and the resolution of the U.S. debt ceiling. The week saw solid gains across the region, reflecting the market’s confidence in these potential developments. In contrast to past weeks, the rally was broad-based, with small and mid-cap outpacing large caps, and growth and value enjoying solid gains. In Europe, major indices improved slightly on news of U.S. debt ceiling talks and on Eurozone’s inflation dropping in May to 6.1 from April’s 7.0. However, investor enthusiasm was tempered when the European Central Bank President, Christine Lagarde, responded that inflation was still “too high” and “set to remain so for too long.” 1
On Tuesday, the Conference Board reported that Consumer Confidence fell in May to 102.3 from 103.7 in April. Based on consumers’ assessment of current business and labor market conditions, the Present Situation Index decreased to 148.6 from 151.8 last month. The Expectations Index, consumers’ short-term outlook for income, business and labor market conditions, fell slightly to 71.5 from 71.7. The Expectations Index has now remained below 80, the level associated with a recession within the next year, every month since February 2022, except for a brief uptick in December 2022. Consumers expect inflation over the 12 months to average 6.1% and continue to view inflation as a significant influence on their outlook of the economy. 2 On Tuesday, the S&P CoreLogic Case-Shiller 20-City Composite Home Price Index showed a 0.5% increase in March, as inventory levels remained tight. With mortgage rates rising to over 7%, owners considering selling are reluctant. Home prices in the Southeast led, while prices in the West continue to drag.3
In another sign that the economy hasn’t decelerated enough for the Federal Reserve to pause rate increases, the Labor Department’s latest delivered a positive surprise, revealing a total of 10.1 million job openings on the last day of April. Hires changed little at 6.1 million, while total separations fell to 5.7 million, with layoffs and discharges decreasing by 1.6 million. Job openings gains were led by retail, health care, transportation and warehousing. Job listings fell in manufacturing, government, leisure and hospitality sectors.4 Following the JOLTs report on Thursday, the payroll services firm ADP reported that private sector payrolls rose by 278,000 in May versus the Wall Street Journal’s forecast of 180,000. By region, the Northeast added 197,000 jobs, the Midwest 139,000, the West 134,000, and the South was the outlier, losing 204,000. Goods-producing added 110,000 jobs, and service-providing expanded by 168,000. Within the goods-producing category, manufacturing lost 48,000, and leisure and hospitality led the service sector jobs with 208,000. 5 Initial jobless claims for the week ending May 27 increased by 2,000 to 232,000. The claims for all benefit programs for the week ending May 13 was 1,636,717 – a decrease of 1,253 from the previous week.6
The U.S. ISM Manufacturing Purchasing Managers’ Index for May was 46.9 – down 0.2 percentage points from April’s reading and down overall for the seventh consecutive month. However, based on the various components of the survey, manufacturing could be poised for a rebound. Supplier delivery performance is at its best in 14 years, the Prices Index returned to “decreasing” territory at 44.2 percent in May, and with the Backlog of Orders Index (37.5 percent) at its lowest level since February 2009, factories are running out of backlogs to reduce. The potential problem is that the New Orders Index is down 3.1 percentage points in May to 42.6. The Employment Index increased to 51.4%, but unless new orders trickle in, the increase in employment could be temporary.7
The big news on Friday was that the Bureau of Labor Statistics report on non-farm payrolls increased by 339,000 compared to estimates of 190,000. The unemployment rate rose to 3.7% from 3.4%, and hourly wages slowed with of increase of 0.3%. On an annualized basis, wages are up 4.3%, down from a 4.4% increase the previous month and 5.9% at the peak.8
With mixed messaging from the data, the market probabilities for the next rate hike in the last three days of the week fluctuated from 70% to 30% to finish the week at 60%. While mega large-cap tech, and more recently AI, has dominated index performance this year, this week, the leadership breath widened on optimism that Fed rate increases are behind us and that the prospects of a hard landing recession have reduced.
Sources:
2https://www.conference-board.org/topics/consumer-confidence
3https://press.spglobal.com/2023-05-30-S-P-CORELOGIC-CASE-SHILLER-INDEX-REBOUND-CONTINUED-IN-MARCH
4https://www.bls.gov/news.release/pdf/jolts.pdf
6https://www.dol.gov/ui/data.pdf
8https://www.bls.gov/news.release/pdf/empsit.pdf
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Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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