Overview:  Stocks were positive across the globe last week, as positive earnings and economic data continued to fuel the economic recovery. On the earnings front, 97% of S&P 500 companies have reported first-quarter earnings, with earnings on pace to rise 50% from a year ago, the biggest increase since 2010. 86% of companies have topped projections, and actual results have exceeded estimates by a record 23% (Factset). Economic strength and improvements in profitability have driven stocks to near record highs, with the S&P 500 index up 1.2% for the week and 0.5% for the month of May, its fourth consecutive monthly rise. In the U.S., inflation concerns continue to be a focus of investors. Last week the personal consumption expenditure (PCE) price index, the preferred measure of inflation for the Fed, surged 3.6% year-over-year. This number is well above the Fed’s 2.0% inflation target, and reflects a surge in consumer demand as economies re-open around the country. In the bond markets, U.S. Treasuries yields declined last week, with the 2- and 10-Year yields closing out the month of May at 0.14% and 1.58% respectively. Markets now look forward to a monthly jobs report this Friday that will give further indication to the state of the labor markets. Expectations are for 645,000 new jobs to be created, with the unemployment rate falling from 6.1% to 5.9%. This follows a weak April jobs report that showed the economy generated 266,000, well below expectations. Investors are also watching for signs that the Fed will consider raising rates or trimming bond purchases earlier than anticipated. Forward guidance from the Fed may be updated at the upcoming Federal Open Market Committee (FOMC) meeting on June15-16 if the economic recovery continues to make rapid progress.

A Note on Housing: (from JP Morgan) The U.S. real estate market has been booming as mortgage rates have fallen to historical lows and work-from-home has encouraged relocation from urban apartments to suburban homes. Housing inventory relative to sales has collapsed to the lowest level on record, intensifying the upward pressure on prices and slowing new home sales after peaking earlier this year. Home prices surged 13.2% year over year in March, according to S&P Case-Shiller data, marking the strongest rate since 2005. As investors eye inflationary pressures closely, housing is a big part of the overall inflation equation. Owner’s equivalent rent (OER) makes up one-fourth of the consumer price index (CPI) and lags the reality of the housing market. The survey is based on a homeowner’s expectations for a hypothetical rental price of their home, and homeowners are much slower to adjust their expectations than the housing market is to react to supply and demand. The calculation of OER also smooths recent hikes by using the monthly average of the six-month change in expected prices. This helps explain why the OER only increased 2% year over year in April, close to the slowest annual growth since 2012. Meanwhile, inflation is real for those looking to buy a home, and several measures of the housing market show booming activity. If the tide starts to turn on owner’s equivalent rent, this could be a tailwind for inflation that is stickier than the transitory boosts from supply bottlenecks and could drive inflation expectations higher.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, FactSet

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