Sightline Weekly Market Update: Reaccelerating Inflation Shakes Markets
Equities started the week on a positive note, only to succumb later in the week as investors realized that inflation might not be receding. On Friday, the selling continued picking up pace after the hotter-than-expected headline inflation figure came in at 8.6% year-over-year versus the consensus of 8.2%. The TSX, held up by oil, lost 2.5% in the week, and oil gained 1.4% in the week. The Dow Jones fell 4.58%, the S&P 500 lost 1.23% and the Nasdaq dropped 5.60% in the week. The S&P 400 Mid Cap index and the Russell 2000 lost 4.68% and 4.41%, respectively. In Europe, equities fell in response to comments from the European Central Bank suggesting it may increase rates faster after July when it planned to suspend its supportive monetary policy. The pan-European 600 Index fell 3.95%, the German DAX declined 4.83%, the French CAC 40 Index dropped 4.60%, and Italy’s FTSE MIB index tumbled 6.70%. The UK’s FTSE Index lost 2.86% during the week.
Economic data was minimal in the US last week. Last Tuesday, it was reported that the US trade deficit shrank in April to $87.1 billion or 19%, helped in part by exports rising 3.5% to $252.6 billion and imports falling 3.4% to $339.7 billion. The trade deficit is subtracted from the gross domestic product and was the reason for the negative GDP print for the first quarter of 2022. Increasing exports of petroleum, natural gas and other oil derivatives, along with exports of soybeans and aircraft, contributed to the increase in exports.1
On Thursday, the Department of Labor released the initial claims for the week ending June 4. The latest reading jumped to 229,000, an increase of 27,000 from the previous reading. A Wall Street Journal poll of economist forecasted claims to total 195,000. Data from holiday weeks are notoriously flawed, indicating we should wait for the numbers this week before jumping to conclusions. Claims for all benefits for programs edged lower by 35,619 to 1,283,684 compared to a year ago in the same week of 15,385,233.2,3
Also, on Thursday, the US Federal Reserve reported that US household net worth fell by $5.4 billion in its latest flow of funds report. Debt grew by 8.3% in the first quarter, following an 8% increase in Q4 of 2021. Mortgage and credit card debt increased by 8% to $12 trillion and 8.7% to $4.5 trillion, respectively. Exposure to equities declined by $2.96 trillion, offset partly by a rise in real estate values of $1.6 trillion.4
The big data release for the week was the latest CPI headline reading, coming in at 8.6% year-over-year. Ex-food and energy, the core index rose 6.0% year-over-year. No surprise, food and energy were two of the most significant contributors to the increase, with food rising 1.2% in May and gasoline increasing 4.1% in May. The latest 8.6% inflation number is the largest reported since December 1981.5 The Fed uses the core inflation rate as a more accurate indicator of price trends rather than the headline rate, which includes food and energy.
To finish off the week, the University of Michigan reported consumer sentiment fell to 50.2 from 58.4 in May. The latest sentiment reading was significantly lower than a Bloomberg Survey of economists forecasting a 58.1 reading. The current conditions survey fell to a record low of 55.4 from 63.3, the index of expected business conditions fell to the second-lowest reading since 1980, and the surveyed participants expect inflation next year to be 5.4%, an increase from 5.3% a month earlier.6
4 https://www.federalreserve.gov/releases/z1/20220609/html/recent_developments.htm; https://www.marketwatch.com/story/u-s-household-net-worth-declines-in-first-quarter-on-lower-stock-prices-11654793543?mod=economy-politics
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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