Overview: Stocks across the globe were up modestly last week, continuing their rally, with the S&P 500 index reaching a record high. Inflationary pressures driven by pent-up demand and supply shortages are expected to be transitory, and concerns that the Federal Reserve will increase rates sooner than expected have abated. Stock returns have been strong year-to-date, with the S&P 500 up 13.8% for the year, followed by international developed and emerging markets up 11.9% and 7.9%, respectively. Bond yields fell over the week, with the 10-year Treasury finishing the week 10 basis points (0.10%) lower in yield at 1.46%. The 10-year Treasury yields are now about 0.30% lower since the end of March 2021, a clear signal that for now at least, markets believe inflation to be temporary. This week we will have the scheduled Fed meeting Tuesday and Wednesday, followed by a press conference and updated forecasts from the committee on interest rates and monetary support. In addition, we will get key economic reports on producer prices (PPI) and retail sales on Tuesday, followed by housing data on Wednesday.
A Note on the Job Markets: (from JP Morgan) Last week’s JOLTS report surprised to the upside, with the number of job openings coming in ~1M higher than analysts’ expectations at a series-high of 9.28M. This is not an isolated uptick; rather, job openings have been on the rise over the last year, +1.0M m/m and +4.7M y/y. More remarkable is the fact that the total number of jobs available now nearly eclipses the total number of unemployed Americans, which stands at 9.31M as of May. This is further heightened by a series-high quit rate of 2.7% in April, a sign that workers are finding it relatively easy to switch jobs if they prefer. This labor market tightness reflects the current low immigration rate and the reality that some Americans are making more money from unemployment benefits than they would working. As a result of this tightening, there is an upward pressure on wages, especially for low-skilled jobs. The current relationship between the total number of jobs available and the total number of unemployed Americans will be interesting to track in the months ahead as pandemic-related benefits will have expired in 25 states by June and in the rest of states by September. If this mismatch continues upon expiration of benefits, inflation may begin to rise long before the unemployment rate falls to a level that the Fed would deem “maximum employment” If higher inflation proves to be less “transitory” than the Fed expects, investors may want to be positioned in value stocks, real assets and inflation-protected bonds to combat mounting inflationary pressure.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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