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2020 Financial Markets Update

Week in Review: May 6, 2022

Recap & Commentary

The S&P 500 ended a volatile week nearly unchanged as investors digested the Federal Reserve’s decision to raise rates by the most at a single meeting since 2000. The week, however, felt quite jarring as it included a day in which the S&P 500 gained 3%, only to be followed by a 3.6% loss the following day.

As expected, the Fed raised rates by 0.50% at its May meeting. Speaking afterwards, Fed Chair Jay Powell was unusually frank, saying that “additional 50 basis point increases should be on the table at the next couple of meetings.” When pressed on whether the Fed might consider being even more aggressive, Powell responded by saying a “75 basis point increase is not something the committee is actively considering.” That comment propelled the S&P 500 to a 3.0% gain, its largest since May 2020, and helped assuage growing concerns about how aggressive the Fed might be in its attempt to slow inflation.

However, after having a night to reflect on Powell’s comments, investors seemed to conclude that the Fed is in fact committed to aggressively trying to slow inflation. In particular, investors appeared to focus more on Powell’s use of “actively” when qualifying his expectations for a 0.75% increase, interpreting it to mean that the Fed could in fact consider such a move at an upcoming meeting if inflation continues to accelerate. In addition, investors seemed to awake to the fact that 0.50% rate hikes at the Fed’s next three meetings would likely result in the Fed Funds rate ending the year closer to 3%, rather than the 2% which the Fed predicted as recently as March.

Interest rates continued to rise, with the 10-Year Treasury yield closing above 3% for the first time since late 2018. Much like the Dow Jones reaching a new round number, e.g. 30,000, there is no added importance to the 10-Year reaching 3%.  However, from a psychological standpoint, it is another reminder of the quick ascent yields have experienced since the start of the year.

Economic Commentary

Nonfarm payrolls added 428K jobs in April, the 12th consecutive month of job creation in excess of 400K. Unemployment remained unchanged at 3.6%. Somewhat disappointingly, the labor force participation rate dipped 0.2% to 62.2%, as 363K individuals exited the workforce. Despite employers’ best efforts to attract new employees, including significantly higher wages, the labor force participation rate remains 1.2% below its February 2020 level.

In March, job openings rose to a new record high of 11.55M. With nearly two jobs available for each job seeker, companies will have to continue offering higher salaries to attract or retain employees, placing further pressure on inflation.

According to industry group ISM, economic activity slowed in April led by manufacturing which fell to its slowest pace since July 2020. Services activity also slowed, but more notably, hiring contracted for the second time in the past three months. At the same time, services input prices set a new record high reflecting ongoing inflationary pressures

Of Note

Through Friday, 87% of S&P 500 companies had reported 1Q22 earnings.  Thus far, 79% of companies have exceeded their earnings estimate. According to industry group FactSet, aggregate earnings growth is expected to be 9.1%.

S&P 500-0.2%
Small Caps-1.3%
Intl. Developed-3.0%
Intl. Emerging-4.2%
Commodities0.7%
U.S. Bond Market-1.1%
10-Year Treas. Yield3.12%
U.S. Dollar0.7%
WTI Oil ($/bl)$111
Gold ($/oz)$1,883

The Week Ahead

  • Consumer Inflation (CPI)
  • Producer Inflation (PPI)
  • Consumer Sentiment
  • Weekly Jobless Claims

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