Hey Folks, as we round out the second half of May the odds favor more downside in US markets. Get my take on the current state of the US Economy and Financial Markets in our Weekly Round-Up.
WEEKLY SOUND BITES:
US indexes ended mostly lower for the week with the NASDAQ the only US Index finishing in the green.
The week’s economic calendar was relatively light overall but included highly anticipated inflation data. On Wednesday, the S&P 500 Index jumped 1% in premarket trading after the Labor Department reported that headline consumer prices had risen 4.9% over the year ended in April, a tick below consensus expectations and the slowest pace in two years. Core inflation, which excludes volatile food and energy prices, was in line with expectations over the period, rising 5.5%. Fed officials did not seem to moderate their inflation and interest rate expectations in reaction to the data, however as the Fed Fund futures are forecasting over 3 rate cuts by Jan 2024. In fact, the markets were pricing in less than a 1% chance that the Fed would keep rates steady through the end of 2023. News on Friday of a jump in consumers’ inflation expectations seemed to drive stocks lower and bond yields higher, reversing a decline through much of the week. Americans polled by the University of Michigan expected annual inflation to run at 3.2% over the next five years, the highest level since 2011.
Regarding the US Debt Ceiling debate, many still believe the most likely outcome is a compromise deal with spending caps, modest near-term budget concessions from Democrats, and an 18- to 24-month debt ceiling extension.
In Europe the ECB could raise its deposit rate beyond the peak 3.50% level currently expected by the market. Persistently strong inflationary pressures support hiking rates in the short term. The BoE raised its key interest rate by a quarter point to 4.25%, with policymakers voting 7–2 to increase borrowing costs to the highest level since 2008. They also raised its inflation forecast and called for inflation to slow to 5.1% by year-end, instead of the 3.9% they had originally forecast in February. The BoE also revised its economic growth forecast, projecting zero growth in the second quarter, as opposed to a 0.7% contraction. The UK economy grew 0.1% in the first quarter, skirting a forecast recession, however, GDP in March unexpectedly fell 0.3% sequentially amid widespread decreases across the services sector.
In Japan, signs of strength in corporate earnings supported their markets over the week. Investors continued to watch for any indication that the Bank of Japan could move away from its ultra-accommodative monetary policy stance. BoJ Governor Kazuo Ueda stated during the week that once the outlook indicates that sustainable and stable 2% inflation will be achieved, the central bank would like to end yield curve control and proceed to shrinking its balance sheet.
Chinese equities retreated in the first full week of trading after the five-day Labor Day holiday as investors grew concerned about the strength of the country’s recovery. The latest economic data appeared to support expectations that China’s central bank will ease policy in the near term to support an economy that has lately showed signs of losing momentum following a post-pandemic rebound. On the trade front, China’s exports rose 8.5% in April from a year ago, easing from 14.8% growth in March. Imports fell a greater-than-expected 7.9%, from a 1.4% decline the previous month, reinforcing growth concerns following disappointing manufacturing and services activity readings in the prior week. China’s official manufacturing Purchasing Managers’ Index unexpectedly contracted in April for the first time since December.
Enjoy this week’s round-up;
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