Sightline Weekly Market Update: Have We Seen Peak Inflation?
After seven consecutive weeks of declines, the equity market rebounded last week. Upbeat earnings reports from Macy’s, Nordstrom and Ralph Lauren helped spur the market turnaround as fears that consumers were under pressure reversed course from the weaker outlook presented by Walmart and Target two weeks ago. Economic data suggesting inflation may have peaked added to the optimism. With all sectors pushing higher, led by consumer discretionary and energy, the Dow Jones leaped 6.24%, the S&P bounced 6.58%, the Nasdaq climbed 6.84%, and the Russell and S&P 400 Midcap indices posted gains of 6.46% and 6.50% respectively. The TSX increased 2.7% in the week, and oil moved 4.4% higher. In Europe, the pan-European STOXX Europe 600 Index finished the week 2.98% higher. The German DAX rose 3.44%, the French CAC 40 Index increased by 3.67%, Italy’s FTSE MIB Index increased by 2.25%, and the UK’s FTSE 100 Index advanced 2.65%.
Last Tuesday, in economic news, the S&P Global Flash US Composite PMI headline registered 53.8 in May compared to 56.0 in April, suggesting a slower rate of expansion of business activity in the US private sector. (A number over 50 indicates growth). Manufacturers and service providers reported inflationary pressures, softer output, continued deterioration in supplier delivery times and weaker demand. The PMI Services Business Activity Index fell to 53.5 from April’s 55.6, a four-month low. The Manufacturing Output Index dropped to 55.2 in May from April’s 57.6, a three-month low, and the US Manufacturing PMI declined to 57.5 compared to April’s 59.2, also a three-month low. In contrast, in the face of rising input costs, private sector new orders continued to increase in May, although at a slower pace. The pace of input price increases is close to a new series high, mainly driven by a record in service sector input prices. The expansion rate of new export orders fell to a four-month low in May, which is not surprising given the recent strength of the US dollar.1
Also last Tuesday, the US Census Bureau released the latest sales of new single-family houses in April. Sales for April declined to an annualized rate of 591,000 from the revised March 709,000 rate. Surveys expected a much higher annualized rate of 750,000.2 Median sales prices moved up to $450,600 from the adjusted April sale price of $435,000. The current number of new houses available is 444,000, or a nine-month supply at the current sales rate. With mortgage rates jumping from 2.75% for a 30-year fixed to 5.25% in May, it is not unexpected that the housing sales would slow.3
In other economic data, the increase for durable goods, long-lasting goods such as machinery and electronics, increased in April by 0.4%. The latest reading signals that the economy is still growing steadily, but it is the weakest in seven months and could indicate slowing economic conditions.4 Also, on Wednesday, the minutes of the FOMC reported most of the Federal Reserve officials thought that 50-basis-point increases would be appropriate at the next couple of meetings. After the expected hikes, they would reassess the economic conditions to determine if further rate increases were necessary to align inflation with expectations.5
On Thursday, jobless claims fell by 8,000 last week to 210,000. Continuing claims for all benefits decreased by 54,282 to 1,317,178 compared to the same week in 2021 of 15,797,261.6 On Friday, the Fed’s favored inflation indicator, PCE (personal consumption price index), rose 0.2%, and the core rate increased 0.3%, bringing the annual rate of inflation to 6.3% compared to 6.6% in the prior month. The US Bureau of Labor Statistics, a better-known consumer price index, runs at 8.3%.7 The modest reduction in the latest inflation readings is giving hope that we might have seen peak inflation for this cycle and providing hope for a soft landing.
With the latest economic data and the current valuations, many investors are finding asset prices more attractive than a couple of months ago, resulting in a short-term rally.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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