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Weekly Market Update for May 12, 2023

by Jim Ulland

On Wednesday, the Consumer Price Index (CPI) declined for the tenth straight month. After peaking at 9.1% last summer, the April rate was 4.9%. Thursday, the Producer Price Index – often viewed as the price of components that go into making finished goods – also showed a sequential deceleration. This is the trend we want to see. The Fed’s goal is to bring inflation down, and down it is coming.

The Fed also wants to reduce demand by slowing the economy. The tool they are using to achieve this is interest rates. The Fed meets eight times a year and – for the tenth straight meeting – raised interest rates. The effects of higher interest rates are showing. This week, claims for unemployment hit the highest level in nineteen months. Office buildings are having trouble refinancing their debt as it comes due. The IDS Center, where we office, is having this problem. Banks are pressured since they must compete for deposits with the US Treasury. So far three large banks have not been able to adjust in time to the swift rate rise and have failed. As banks implement tighter lending standards, the economy will slow further, taking pressure off prices and wage rates.

Many analysts feel the Fed, at its May 3rd press conference, implied that it has paused its rate raising effort. If so, this will be confirmed at the next Fed meeting on June 14th. As inflation comes under control, the Fed can end the pause and lower rates, which will allow the economy to resume normal growth. Interest rates could be reduced as early as year-end 2023. A substantial rise in both fixed income securities and equities should follow.

Reaching agreement on the Debt Ceiling debate also would give the market a boost and restore some stability to the financial sector. A period of stability could do wonders for fixed income security prices.

While this plays out, US Treasuries remain an attractive option for money sitting in checking accounts or in CDs paying little. The 6-month US Treasury has a yield of 5.1%. Contact us if this might fit your situation.

Next week, we expect Congressional negotiators to announce that progress on a debt ceiling agreement is being made. This dispute has been a cloud on the market, which ended relatively flat for the week. The S&P 500 was -0.29% and NASDAQ +0.40%. Monday the S&P 500 was +0.05%, Tuesday -0.46%, Wednesday +0.45%, Thursday -0.17%, and Friday -0.16%.

The information contained in this commentary is not investment advice for any person. It is presented only for informational purposes to assist in explaining factors that may have had an impact in the past or may have an impact in the future on client portfolios or composites. All expressions of opinion reflect the judgment of the firm on this date and are subject to change. Included information has been obtained from sources considered reliable, but we do not guarantee that the foregoing materials are accurate or complete. Investors should contact Ulland Investment Advisors for individualized information prior to deciding to participate in any portfolio or making any investment decision. Ulland Investment Advisors does not provide tax advice. All investors are strongly urged to consult with their tax advisors regarding any potential investment.

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Ulland Investment Advisors

4550 IDS Center · Eighty South Eighth Street · Minneapolis MN 55402 · Telephone: 612-312-1400 · Facsimile: 612-204-3464