Overview: Global stock markets traded lower last week, as investors continue to digest news from the latest Federal Reserve meeting. As expected, the Fed left the target funds rate unchanged at 0-0.25% but increased the median expected path for the policy rate to show two rate hikes in 2023, up from none in March. The faster rate hike timeline, along with the specter of inflation running above the 2% Fed target, sent stocks lower and short rates higher. In the U.S., the S&P 500 index ended the week down -1.9%, with international developed stocks (MSCI EAFE) and emerging markets (MSCI EM) down -2.4% and -1.4% respectively. In bonds, the 2-year Treasury ended the week 11 basis points higher at 0.26%, while the 10-year Treasury held steady at 1.45%. In economic data, retail sales declined -1.3% in May, most likely a reflection of a shift in spending from goods to travel and leisure. Jobless claims rose for the first time in two months to 412,000, although expectations are for a continued decline in initial claims as the economy continues to recover.
Inflation commentary: (from JP Morgan) Inflation signals have been heating up with consumer price inflation blowing past expectations and wages rising as labor demand rapidly outpaces supply. Another important metric of rising inflation pressures, the Producer Price Index, shows input costs are surging beyond just a few select industries. PPI data show that prices received by producers of goods and services rose 0.8% m/m and 6.6% y/y in May, with nearly 60% of this increase attributed to a 1.5% rise in the prices for goods. Looking further up the supply chain, commodity prices, a traditional harbinger of inflation, have also been soaring. Commodity prices early in the production cycle, as measured by the PPI component unprocessed goods for intermediate demand, rose 8.4% m/m and 57.9% y/y in May, the largest rise since 1973. As demand for goods remains exceptionally strong, it is more likely that these higher input prices will be passed down the supply chain and ultimately result in higher consumer price inflation. While the Fed continues to believe that recent inflation will be transitory, surging upstream input prices still suggest additional inflation pressures ahead. It is also important to recognize that commodities are global, and as vaccinations accelerate in Europe and East Asia, commodity inflation could remain strong through the end of the year, providing additional fuel to recently higher inflation and putting further pressure on the Federal Reserve to accelerate its normalization of monetary policy.
Weekly Returns and Data:
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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