Market Monitor: June 10, 2022, Update
Headlines and Highlights
- Consumer prices accelerated in May: Consumer prices rose to a new four-decade high last month, climbing a more-than-expected 8.6% over a year earlier after having edged lower in April. The increase reported Friday was led by jumps in prices for gasoline, groceries, rent and airline fares. Core inflation, which strips out food and energy prices because of the volatility of those categories, edged lower to 6.0% year-over-year and was up 0.6% from the previous month. Price growth in the service sector slowed slightly.
- Markets remain in trading range, still headed for Q2 losses: Stocks have traded in a range for the past month as investors try to gauge the impact of higher interest rates and the direction of inflation. While the S&P 500 is little-changed from one month ago, many stocks have added to their year-to-date losses and major stock and bond indexes are on pace for a second straight quarter of simultaneously negative returns for only the fourth time since 1976.
- Global economic outlook reduced: Two leading international institutions lowered their forecasts for world economic growth in 2022, citing Russia’s invasion of Ukraine and the resulting surge in energy and food prices, supply-chain disruptions and higher interest rates. The World Bank predicted global growth of 2.9%, down from 4.1% in January. The Organization for Economic Cooperation and Development pegged 2022 growth at 3% worldwide, down from its 4.5% forecast last December, and 2.5% in the United States, down from a 3.7% estimate.
Chart of Interest
A work in progress: Core inflation dipped again in May but overall CPI exceeded estimates.
Sources: St. Louis Federal Reserve, Altair Advisers
- The rise in consumer prices adds pressure on the Federal Reserve to proceed with additional half-percentage-point increases in the federal funds rate at its next two meetings in its push to bring inflation down. Core CPI, while still high, has moderated since March, furthering our expectation that inflation will trend lower for the rest of the year.
- The European Central Bank’s decision this week to end its program of stimulative bond purchases and raise interest rates puts more pressure on the global economy as the era of easy money from central banks ends. The world economy’s recovery this year from the COVID-19 pandemic has been hindered by lockdowns in China as well as the war in Ukraine, but not derailed.
- The U.S. economy continues to weather the Fed’s tightening and higher inflation well. Growth has slowed and the economy is estimated to expand at an annual pace of just 0.9% in the second quarter, according to the Atlanta Fed. But earnings for S&P 500 companies, while moderating, are still estimated to grow by 10% in 2022 based on the latest consensus estimate from FactSet.
- The labor market recovery shows little sign of weakening, with jobless claims remaining near multi-decade lows even after the largest increase in jobless claims in 11 months last week. The economy continues to be supported by growth in hiring and jobs numbers, with no evidence of a meaningful rise in layoffs.
- The yield on the 10-year U.S. Treasury note has climbed back above 3%, weighing on bond prices again after last month’s respite from a year-long rise in yields. Our base-case scenario is for the benchmark yield to remain range-bound for the remainder of the year, easing pressure on bond prices following their historic plunge in the first half.
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