Economy Slowing, Inflation Decelerating, How Many More Bullets Will the Fed Use? (May 27 Market Recap)

Economy Slowing, Inflation Decelerating, How Many More Bullets Will the Fed Use? (May 27 Market Recap)

Economy Slowing, Inflation Decelerating, How Many More Bullets Will the Fed Use? May 27 Market Recap 

Indices 

Dow 33,212 +1,950 or +6.2% 

Nasdaq 12,131 +776 or +6.8% 

S&P 4,158 +257 or +6.6% 

USD10Y 2.743% (4.4bp) or (1.5%) 

Fed, Your Move 

The minutes from the last Federal Reserve Open Market Committee meeting were released this week and showed that while members were unanimous in their desire to raise rates decisively to tame inflation, including 50 bp hikes in each of the next two meetings in June and July, they felt this gave them the opportunity, depending on the data, to pause rate hikes when they meet again in September. The market responded by rallying furiously all week as economic data continued to show a slowing economy and the conventional narrative may be beginning to incorporate assumptions of a fall pause.

Why Would the Fed Pause?  

The economic data is coming in fast and furious and it has not been positive. On top of last week’s poor showing, this week gave us the following data points… 

• April new home sales missed considerably; annualized unit sales were expected to be 750,000 and the print was 591,000. 
• May Flash Global Manufacturing PMI narrowly beat at 57.5 vs 57.4 expected and vs last month’s 59.2. 
• May Flash Services PMI missed at 53.5 vs 55 expected and last month’s 55.6. 
• April Durable Goods Orders missed at +0.4 vs expectations of +0.7 and last month’s +0.6 print. 
• April Core Capital Equipment Orders were down month over month at +0.3 vs +1.1 in March. 
• Q1 GDP (2nd reading) was revised lower from –1.4% to –1.5%. 
• April PCE Inflation slowed to +6.3% year over year (YoY) vs last month’s +6.6% number. The month over month (MoM) was even better, slowing to +0.2% vs last month’s +0.9%. 
• April Core PCE decreased to +4.9% YoY vs March’s +5.3% and the month over month (MoM) number was unchanged from March’s +0.3%. 

In addition to the welcome slowdown of the April PCE inflation data, the annualized Core CPI number is much different from the headline number that has been touted and continues to be touted every month even though the YoY number is backward looking. Year to date, the MoM increases to Core CPI this year have been as follows… 

Core CPI YTD 2022

Jan +0.6%

Feb +0.5%

Mar +0.3%

April +0.6%

Annualizing these numbers results in a +6.0% annual Core CPI. That is still an elevated number but is quite different from the headline YoY number from last month which was +8.3% and demonstrates that the pace of inflation is slowing. 

It appears that inflation is finally moderating, the economy is slowing, the labor market is still strong (but could be losing momentum, this Friday’s Non-Farm payrolls will be an important data point) and the Fed may be hard pressed to raise rates beyond the June and July hikes and even the July rate hike may be in question. 

Covid Update 

It appears that the last Omicron strain, BA.2 is burning itself out and the U.S. has survived without a notable increase in mortality. While infections remain above 100,000 (and that number is underreported due to home testing), neither hospitalizations nor deaths have kept pace with the rising rate of infections. 

Covid 14-Day Daily Moving Averages 

Next Week 

There is an avalanche of economic data coming down the pipe this week; home prices, consumer confidence, manufacturing and services PMI, JOLTS, the ADP employment report, factory orders and most importantly, on Friday, the May jobs report (non-farm payrolls). The market will be hoping for another “goldilocks” type number, not too hot (inflationary), nor too cold (suggestive of a possible recession). Market observers are expecting 325,000 jobs created, a strong report, but lower than April’s 428,000 additions.  

Market Data Points Next Week 

• Monday – Earnings: Markets closed in observance of Memorial Day. 
• Tuesday – March S&P Case Schiller and FHFA National Home Price Indices (YoY). May Chicago PMI, May Consumer Confidence Index. Earnings: Salesforce.com (CRM) 
• Wednesday – May S&P Global U.S. Manufacturing PMI (Final), May ISM Manufacturing Index, April Job Openings and Labor Turnover Survey (JOLTS). 
• Thursday – Initial Jobless Claims. May ADP Employment Report. April Factory Orders.  
• Friday – May Non-farm Payrolls, Unemployment Rate, Labor Participation. May S&P Global U.S. Services PMI (Final), May ISM Services Index. 

May 27 Market Recap Trading… 

Monday – Dow +618 to 31,880, Nasdaq +180 to 11,535, S&P +72 to 3,973, USD10Y +7.2bp to 2.859% 

• All eleven S&P sectors traded higher today, led by Financials, Energy, and Technology.  
• President Biden announced his administration was reconsidering some tariffs on Chinese goods that were imposed by the last administration. 
• M&A Activity picking up: VMWare (VMW +24.78%) announced that Broadcom (AVGO) is in talks to acquire the cloud computing company and video game maker Electronic Arts (EA +2.3%) is looking for a suitor. 
• JPMorgan’s CEO Jamie Diamond had positive comments on JPM (+6.19%) as well as the U.S. economy at today’s JPM investor day 
• June WTI Crude closed at $110.59/bbl. 
• Zoom (ZM) beat earnings expectations, reported inline revenues and boosted 2022 guidance. The stock traded up 6% after hours. 

Tuesday – Dow +48 to 31,928, Nasdaq (270) to 11,264, S&P (32) to 3,941, USD10Y (9.9bp) to 2.76% 

• Five of the eleven S&P sectors traded higher today led by Utilities, Consumer Staples, and Real Estate. 
• May Flash Global Manufacturing PMI beat at 57.5 vs 57.4 expected and vs last month’s 59.2. 
• May Flash Services PMI missed at 53.5 vs 55 expected and last month’s 55.6. 
• April New Home Sales was a disaster at 591,000 vs an expected annual rate of 750,000. 
• Earnings: Nordstrom (JWN) rallied 10% after hours on a revenue beat, an earnings miss, and an upbeat outlook which included raising full year guidance. Snap (SNAP) missed on advertising weakness, cut guidance, and plunged 43% dragging down Meta (FB), Twitter (TWTR), Alphabet (GOOG), and Nasdaq with it. Electronics retailer Best Buy (BBY) beat on revenues, missed on earnings, and cut full-year guidance. BBY traded up 1.21%. 

Wednesday – Dow +191 to 32,120, Nasdaq +170 to 11,434, S&P +37 to 3,978, USD10Y (1.1bp) to 2.749%. 

• Nine of eleven S&P sectors traded higher today led by Consumer Discretionary, Energy, and Technology. 
• The FOMC minutes revealed near unanimity amongst the board to raise rates aggressively in 50 bp increments for at least the next several meetings and a possible switch in their outlook from “neutral” to “restrictive.” Apparently, this met market expectations although some observers believed these minutes to express a more hawkish stance than previously assumed by the Fed observers. Since markets rallied today, it appears that investors thought that the Fed had successfully threaded the needle. 
• April Durable Goods Orders missed at +0.4 vs expectations of +0.7 and last month’s +0.6 print. 
• April Core Capital Equipment Orders were down month over month at +0.3 vs +1.1 in March. 
• July WTI Crude settled at $110.79/bbl. 
• Earnings: Nvidia (NVDA –11% after hours) beat top and bottom lines but guided Q2 revenues lower, blaming Russian sanctions and Chinese lockdowns. Williams-Sonoma (WSM +11%) crushed their earnings numbers and beat on the revenue line as well.  

 Thursday – Dow +516 to 32,637, Nasdaq +305 to 11,740, S&P +79 to 4,057, USD10Y +0.7bp to 2.756% 

• Ten of eleven S&P sectors traded higher today led by Consumer Discretionary, Technology, and Financials. 
• Jobless claims were lower than expected at 210,000 claims vs 218,000 expected and last week’s slightly unrevised 218,000 print. Continuing claims ticked up from 1.32 million to 1.35 million. This is the first print in five weeks to beat expectations and the first in four weeks to be sequentially lower than the previous week’s print. 
• June WTI Crude traded up to $114.28/bbl as U.S. crude inventories were lower than expected. 
• Q1 GDP (2nd reading) was revised lower from –1.4% to –1.5%. 
• Earnings: Dollar General (DG) and Dollar Tree (TREE) exploded higher, +13.71% and +21.87% respectively, after beating their numbers and guiding 2022 higher. Macy’s (M) beat their numbers, reaffirmed 2022 sales guidance, boosted 2022 earnings guidance, and traded up 19%. Gap Stores (GPS) guided 2022 expectations lower as their Old Navy unit which caters to the lower income consumer was plagued by changing fashion trends, inventory delays, and an imbalanced mix of clothing sizes; GPS traded down 13%. Ulta Beauty (ULTA) crushed their earnings number and beat their revenue expectations; the stock traded up 6%. Costco (COST) beat revenues and reported inline earnings; COST traded down 2% post close. 

Friday – Dow +575 to 33,212, Nasdaq +390 to 12,131, S&P +100 to 4,158, USD10Y (1.3bp) to 2.743% 

• All eleven S&P sectors traded higher today led by Consumer Discretionary, Technology, and Real Estate. 
• April PCE Inflation slowed to +6.3% year over year (YoY) vs last month’s +6.6% number. The month over month (MoM) was even better, slowing to +0.2% vs last month’s +0.9%. 
• April Core PCE decreased to +4.9% YoY vs March’s +5.3% and the MoM number was unchanged from March’s +0.3%. 
• July WTI Crude continued to creep higher and closed at $115.07/bbl.  

 P.S. If you know of any friends or family members who could benefit from our services and these types of communiques during these unique times, we are accepting new clients and offer a complimentary one-hour review. 

Disclaimer: This is not a recommendation to buy or sell any of the securities listed above. I personally, or a family member whose account I control, have positions in the following securities/assets…Bitcoin, Cardano, Chainlink, Ethereum, ETHE, GBTC, and TSLA.