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2020 Financial Markets Update

Week in Review: May 27, 2022

May 31, 2022

Recap & Commentary

The S&P 500 snapped its seven-week losing streak by gaining 6.6%, its best week since November 2020. Positive inflation data, some better-than-expected earnings reports from retailers, and the release of the minutes from the Federal Reserve’s May meeting helped drive the returns.

Since the start of the year, investors have been nervously watching inflation,  wondering how high it would go and how aggressively the Fed would respond. With inflation continuing to accelerate in the first quarter, investors resigned themselves to the idea that the Fed would have to raise the federal funds rate by 0.50% at multiple meetings this year.

However, fears persisted that the Fed might be forced to raise the rate by as much as 0.75% at some point if inflation refused to abate. In an effort to disabuse investors of that notion, Federal Reserve Chair Jay Powell has stated that such a move is unlikely to be necessary. The release of the Fed’s May meeting minutes helped reinforce that narrative, stating “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings.” The fact that the minutes did not take a more “hawkish” (aggressive) tone, coupled with a slight decline in the annual pace of the Fed’s preferred inflation gauge, helped push markets higher over the course of the week.

Markets also benefitted from earnings reports from a handful of retailers including Nordstrom and Macy’s which suggested that consumer trends are more differentiated, and perhaps not quite as dire as initially feared following disappointing earnings reports from Target and Walmart the prior week.

Economic Commentary

Core personal consumption expenditures (PCE), the Fed’s preferred measure of inflation rose 0.3% in April, the same monthly pace as March. Compared to a year earlier, core PCE slowed from 5.2% to 4.9% corroborating Consumer Price Index and Producer Price Index inflation readings from earlier in the month that showed both measures slowed slightly in April. The slowdown in core PCE was seen as another potential sign that inflation might be reaching an inflection point thereby allowing the Fed to ease back on its more aggressive policy stance by the end of summer. That optimism led to market expectations for a 0.50% rate increase by the Fed at its September meeting to fall to 35%, down from 50% at the end of the prior week.

Housing data continued to slow in April with new home sales falling for a fourth  consecutive month and pending home sales falling for a sixth consecutive month.  Rising mortgage rates, coupled with limited inventory, and record prices continue to weigh on the sector.

Consumer spending rose by a better-than-expected 0.9% in April, while incomes rose just 0.4%.  Consumers’ continued desire, or perhaps need, to spend in spite, or despite, higher inflation and slower income growth having pushed the savings rate to 4.4%, the lowest level since 2008. In April 2020, the savings rate hit a record 33.8% thanks to government stimulus and consumers being stuck at home.

Of Note

Semiconductor company Broadcom announced plans to acquire software company VMWare for $61B, marking the second largest deal of the year behind Microsoft’s $69B acquisition of gaming company Activision Blizzard.

S&P 5006.6%
Small Caps6.5%
Intl. Developed3.4%
Intl. Emerging0.8%
U.S. Bond Market0.8%
10-Year Treas. Yield2.75%
U.S. Dollar-1.5%
WTI Oil ($/bl)$115
Gold ($/oz)$1,851

The Week Ahead

  • May Employment Report
  • JOLTS Report
  • Consumer Confidence
  • ISM Manufacturing
  • ISM Services
  • Weekly Jobless Claims

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