Weekly Market Update
For the second month in a row, markets waited with bated breath for the consumer price index (CPI), and unfortunately investors were once again confronted with a hotter than expected inflation report. Heading into the end of May, stocks rallied on hopes that perhaps inflation was near a peak, but that narrative experienced a major setback on Friday as the May CPI report showed annualized headline inflation of 8.6%, far above consensus estimates of 8.2%, and the highest since 1981. These days when it rains, it pours and Friday also saw the preliminary June consumer sentiment index fall to its lowest ever recorded levels, comparable to readings from the trough of the 1980 recession (per FactSet) as gas prices weighed heavily on consumers. As a result, stocks and bonds both moved lower as interest rates surged and markets ended the week with a notable risk off theme as investors brace for next week’s Federal Reserve policy announcements. It is impossible to draw positives from Friday’s inflation report, but it was perhaps notable that the S&P 500 was able to hold 3,900 as that level also held following April’s hot CPI.
Ultimately it is becoming increasingly clear that the peak in inflation will likely have to coincide with a peak in energy prices. Below we have included a chart from Bloomberg that breaks down the underlying contributors to CPI and while inflation growth is broad based, energy has been a major driver with gasoline rising 4.1% month-over-month in May and national averages flirting with $5/gallon. Next week, the Federal Reserve begins its two-day meeting on the 14th and will make policy announcements on Wednesday at 2PM. May’s hot inflation report makes it a virtual certainty that the Fed will hike interest rates by 50 basis points (0.5%) next week, so investors will be particularly interested in Fed Chair Jerome Powell’s press conference as well as the Fed’s rate hike guidance for the July, September, and November meetings. However, unless the Fed suddenly develops the ability to produce and refine oil into gas and diesel, their tools are less than ideal to confront energy prices and investors will be closely watching headlines out of Ukraine for any indications of de-escalation.
Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder
