Week in Review: May 13, 2022
May 16, 2022
Recap & Commentary
Despite a strong rally on Friday, in which the S&P gained 2.4%, markets ended the week lower as investors continued to grapple with concerns about surging inflation and the Federal Reserve’s efforts to combat it. Given the heightened risk for monetary policy error in the current environment, investors are also growing increasingly nervous about the possibility of a Fed-induced recession.
Inflation data pointed to a slight deceleration in both consumer and producer prices in April. The decline was consistent with our outlook at the start of the year that inflation would begin showing signs of slowing in 2Q22 as the data began to “lap” the jump in inflation that initially occurred in 2Q21.
Currently, however, that thesis is being challenged by fighting in Ukraine and strict enforcement of China’s Zero-COVID policies. Both Ukraine and Russia are leading exporters of numerous energy, agricultural, and other commodities. Reduced supplies from those countries is placing significant upward pressure on European energy prices, as well as global food prices. In China, efforts to combat the spread of the coronavirus has resulted in the lockdown of several major cities including Shanghai, whose population of 25M has been completely locked down since late March. The lockdowns are again straining global supply chains which were beginning to improve early in the year.
Recent market volatility has left the NASDAQ in correction territory (down 20% or more from record highs) and the S&P 500 close to it. The selling pressure, has also led to a marked improvement in valuations. Based on its trailing 12-month price-to-earnings (P/E) ratio, the S&P 500 is now trading slightly below its 10-year average, slightly above its 20-year average, and inline with its 30-year average. That compares to year end 2021 when the index was trading anywhere from 1.5 to 2.0 standard deviations above its 10-, 20-, and 30-year averages.
On a headline basis, consumer prices (CPI) rose just 0.3% in April, the smallest monthly increase since last August, and down significantly from the 1.2% increase in March. However, on a core basis, excluding volatile food and energy prices, inflation rose 0.6%, twice as fast as March, suggesting that inflationary pressures continued to build throughout the economy. Compared to a year ago, headline CPI slowed 0.2% to 8.3%, the first sequential decline in eight months.
Similar to consumer prices, producer prices (PPI) decelerated slightly in April. Compared to a year ago, headline PPI rose 11.0% in April, down from 11.5% in March, while Core PPI slowed from 9.6% to 8.8%. Sustained declines in inflation could boost investor sentiment to the extent it eases concerns about how aggressive the Fed will need to be in raising rates at upcoming meetings.
Consumer sentiment fell to a decade low, dragged down by consumers’ views of both future and current conditions, the latter of which fell to its lowest level since 2013 thanks to surging inflation.
Cryptocurrencies experienced a brutal week with bell-weather Bitcoin falling as much as 27%. TerraUSD, a stablecoin whose value is pegged to the dollar and thus should not drop below $1, plunged to $0.11. Since November, the global market value of cryptocurrencies has fallen by ~50%, or ~$1.4T.
|U.S. Bond Market||0.9%|
|10-Year Treas. Yield||2.92%|
|WTI Oil ($/bl)||$110|
The Week Ahead
- Retail Sales
- Housing Starts
- Existing Home Sales
- Industrial Production
- Weekly Jobless Claims