Market Recap – Week Ending May 17

Stocks Higher Last Week; Earnings Releases Winding Down

Overview: Stocks across the globe were higher last week, led by emerging markets (MCSI EM), up 2.7%, and international developed stocks (MSCI EAFE), higher by 1.7%, on the week. In the U.S., the S&P 500 index recorded an all-time high mid-week, and ultimately finished the week 1.6% higher. Markets were buoyed by the prospect of ongoing disinflation, with last week’s core Consumer Price Index (CPI) data reporting a consensus 3.6% year-over-year inflation reading, down from 3.8% the prior month. A key part of the CPI report was the measure of primary rent, which slowed to a 2½ year low. As price and economy growth continue to show signs of moderation, yields fell last week, with the 2-Year and 10-Year U.S. Treasury notes ending the week  at 4.82% and 4.42%, respectively. This week, the tail-end of the earnings season will spotlight artificial intelligence companies, highlighted by Nvidia’s first-quarter results, due out on Wednesday. Also on Wednesday, the FOMC minutes of the April 30 to May 1 meeting will be released, and  investors will continue to monitor data on the health of the economy with data due on existing home sales and durable goods orders over the course of the week ahead

Update on Inflation (from JP Morgan): Falling inflation in 2H23 encouraged a more accommodative tone from Fed officials. In fact, Fed sentiment, as measured by J.P. Morgan’s Fed Hawk-Dove Speech Score, slowly shifted from hawkish toward a more neutral stance in the fourth quarter. However, after a string of hot CPI prints in 1Q24, heightened inflation uncertainty has caused Fed officials to reassert their hawkish tone. Last week’s data provided an important update on inflation dynamics in the second quarter. To start the week, PPI rose by an unexpectedly strong 0.5% m/m in April, although downward revisions to prior months led Fed Chair Jerome Powell to view the report as more “mixed.” Shortly thereafter, the April CPI report showed a slight slowdown in both headline and core inflation, which rose by 3.4% y/y and 3.6% y/y, respectively. While this report came in as expected, it ended a streak of upside inflation surprises. Lastly, import prices rose by a firm 1.1% y/y, suggesting some disinflationary tailwinds from imported goods may be fading. Despite a busy data schedule, Powell managed to grab headlines early last week. In his comments, he articulated recent data has hurt his confidence in his outlook, although his base case still calls for falling inflation and a prolonged Fed pause opposed to further rate hikes. On balance, this week’s data gives Powell and the broader committee few reasons to change their messaging. Sticky inflation warrants a hawkish tilt, but the broader inflation downtrend justifies a bias for cuts over hikes. While it may take time for the Fed to gain confidence in disinflation, fading price pressures through the summer could open the door for policy easing as soon as September.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC.

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