Market Monitor: April Mid-Month Update
Headlines and Highlights
- Inflation hits new 40-year high amid signs of peaking: Inflation rose last month to another four-decade high of 8.5% in the Consumer Price Index, boosted by a surge in gasoline prices after Russia’s invasion of Ukraine disrupted energy supplies. Core CPI, which excludes food and energy, similarly reached its highest since 1982 at 6.5%. However, a drop in used car prices and electronic components contributed to a slight cooling of core inflation’s sizzling pace on a monthly basis.
- Fed poised to start reducing balance sheet: The Federal Reserve disclosed a plan to begin shrinking its nearly $9 trillion balance sheet by roughly $95 billion a month after doubling its size during the pandemic to prop up the economy. Fed officials suggested the process could start in May or soon after, beginning with allowing about $60 billion in Treasurys and $35 billion in mortgage bonds to roll off monthly without reinvestment. The Fed bought $700 billion in assets in March 2020 and up to another $120 billion monthly before ending the program last month.
- Retail sales rise as consumers keep buying despite inflation: U.S. retail sales rose modestly in March, boosted by inflation, as consumers confronted higher prices but spent more on food services and drinking places as COVID-19’s grip loosened. A separate report from the University of Michigan showed consumer sentiment surprisingly climbed to a three-month high in early April as optimism about job growth and wage expectations more than offset inflation worries.
Chart of Interest
Soaring but slowing: Unlike headline inflation, which includes food and energy, core inflation has grown at a slower pace the past two months.
Source: St. Louis Federal Reserve
- Inflation remains on a path to stay elevated throughout 2022 but is poised to begin moderating. Besides the recent deceleration in monthly price growth, the year-over-year inflation rate will soon start edging lower when compared to a period of higher activity last spring following the economy’s reopening.
- U.S. and global economic growth is forecast to slow this year due to ramifications of inflation and Russia’s war in Ukraine. U.S. real GDP growth for the first quarter is estimated at an annual pace of 1.1% by the Atlanta Federal Reserve. The International Monetary Fund says global GDP will be significantly downgraded in its World Economic Outlook update to be issued next week but will remain in positive territory, avoiding recession.
- Markets trended lower in the first half of April, carrying over one of their worst starts to a year from the first quarter. As measured by category benchmarks, U.S. large-cap stocks were down 7.5% year-to-date, U.S. small caps -10.4%, international developed-markets stocks -8.6%, emerging-markets stocks -9.4%, taxable bonds -8.6% and municipal bonds -6.8%.
- The 10-year Treasury note yield rose this week to the highest level since November 2018 at more than 2.8%, keeping pressure on bond prices, as investors anticipated significant Fed tightening for the rest of the year. After falling briefly below the two-year Treasury yield in a yield curve inversion – sometimes an indicator of a future economic slowdown – the 10-year has climbed back well above its shorter-term counterpart.
- Even as consumers keep buying, investor optimism as gauged by a popular U.S. sentiment survey fell to its lowest level since September 1992, reflecting concerns about inflation, war and rising rates. The weekly survey by the American Association of Individual Investors often serves as a contrarian indicator for the stock market. The S&P 500 has historically gone on to realize above-average returns for the six- and 12-month periods following bearish sentiment readings.
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