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Weekly Market Update for June 10, 2022

by Jared Plotz, Director of Research

What began as a listless, uneventful week ended with a “hot” inflation reading and a “risk-off” market move (S&P 500 down 5.1%, NASDAQ down 5.6%) towards the March 19th lows. This now raises the attention on next week’s Federal Reserve meeting where they will almost certainly raise rates by 50 basis points (0.50%) but will also give updated indications for the rate of future hikes. The 10-year Treasury yield rose 21 basis points (bps) to 3.16% this week and thus fixed income markets were not spared either.

Most economic data were market-negative this week. Mortgage demand hit a 22-year low. Consumer confidence hit a record low. Weekly unemployment claims moved higher. The World Bank lowered their global growth forecast for 2022 from its 4.1% projection in January to a new 2.9% and noting a rising risk of “stagflation,” a scenario where economic growth stagnates amidst continued high inflation. But the most impactful data point was the consumer price index (CPI) for May on Friday, as this held implications for September’s rate hike debate.

Headline CPI for May rose 1.0% m/m and 8.58% y/y, a post-1981 high (March was +8.54%, April +8.26%). “Core” inflation (ex-food, energy) rose 0.6% m/m and 6.0% y/y. Both measures were above market expectations. What this reading did was put a dent in the “peak inflation” narrative that began after the small downtick in April as well as drove a re-pricing of rate expectations for September. Investors are now pulling forward an extra quarter-point hike out of 2023 into 2022, with that expected to come in September, a month which had been debated to be a 25bps or 50bps hike.

Since we own sizeable weights of Amazon in equity accounts, it is worth noting that the company split shares of the stock 20-for-1 this week. This means that you will now own 20x as many shares in your account, but the price became 1/20th of its prior level. While this change initially gave a boost to Amazon’s stock price on Monday, it eventually gave back the gains due to another guidance reduction on profit margins from competitor Target and the overall market weakness starting Thursday afternoon.

With sentiment swinging between fears of stagnation and peaking inflation/Fed hawkishness, all eyes and ears will be on the FOMC meeting Wednesday. Next week will also bring a second measure of inflation on Tuesday (PPI) and a string of May industrial readings. PPI could show a “less hot” inflation picture vs. the CPI, but if not, we are looking for a peak in inflation later this summer as higher-frequency indicators do point to a potential move lower.

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