Week in Review: June 3, 2022
June 6, 2022
Recap & Commentary
Markets ended the week lower following comments by Federal Reserve Vice Chair Lael Brainard, a growing chorus of corporate leaders expressing concerns about the U.S. economy, and May’s stronger-than-expected employment report.
Fed Vice Chair Lael Brainard, often viewed as a “dove” on monetary policy, rejected the idea that the Federal Reserve might pause its rate hikes later this summer in order to ascertain their efficacy up to that point. In an interview with CNBC, Brainard said the Fed has “a lot of work to do” to combat inflation and that its “very hard” to envision a pause in rate hikes at the Fed’s September meeting.
As concerns about the consumer’s ability to withstand continued high inflation intensify, so to has the chorus of corporate leaders sounding the alarm on the possibility of a recession. On Wednesday, J.P. Morgan CEO Jamie Dimon likened the threat of a recession to that of a hurricane, saying while things currently seem fine, he sees an economic “hurricane” approaching. However, by his own admission, Dimon is unsure as to the strength of the storm.
On Friday, Tesla CEO Elon Musk announced that the company will look to cut nearly 10% of salaried employees given his “super bad feeling” about the economy. Musk noted, however, that production headcount related to building cars, battery packs, or installing solar panels would increase.
As talk of recession increases, it is important to remember that the markets are not the economy and vice versa. Thus, while economic growth may slow, it does not necessarily mean that markets will move significantly lower. In fact, if history is any guide, markets often bottom ahead of the broader economy.
Nonfarm payrolls added 390K new jobs in May, well above the expected 325K, but below the 400K+ recorded in 11 of the past 12 months. As is sometimes the case, initial market reaction was “good news is bad.” In the context of monetary policy, continued strong hiring was viewed as maintaining pressure on the Fed in its fight against inflation. Other market participants viewed the data as more of a “Goldilocks” report, strong enough to help refute the notion that the economy is headed for recession, but not strong enough to force the Fed to become even more aggressive in its efforts to fight inflation. Unemployment remained steady at 3.6%, as the number of new hires was effectively offset by a similar number of individuals entering the workforce in search of employment.
Activity in the manufacturing and services sector was mixed, according to industry group ISM. Manufacturing activity accelerated slightly in May, while service sector activity decelerated slightly. Both sectors saw pricing pressures ease, though they remain near record levels. Employment remained challenging, with service sector employment effectively unchanged after contracting slightly in April. Manufacturing employment fell slightly in May after barely expanding in April. Turnover (resignations and retirements) continue to be a challenge as corroborated by the April Jobs report showing 4.4M resignations.
The European Union (EU) agreed to phase out seaborne imports of Russian oil and refined petroleum products over the next six to eight months. In 2021, the EU imported $51.5B of Russian oil, of which ~65% was imported by tanker.
|U.S. Bond Market||0.9%|
|10-Year Treas. Yield||2.94%|
|WTI Oil ($/bl)||$120|
The Week Ahead
- Consumer Inflation (CPI)
- Consumer Sentiment
- Consumer Credit
- Trade Balance
- Weekly Jobless Claims