Inflation Concerns Have Analysts Speculating Strategy for a Higher Interest Rate Environment
Market Recap Week ending 5.28.21
Financial markets moved higher throughout the week as the inflation debate continued on Wall Street. A full economic calendar was headlined by the PCE Price Index, the Federal Reserve’s preferred measure of inflation. In Washington, Senate Republicans countered the Biden administration’s 1.7 trillion-dollar American Jobs Plan with a 928-billion-dollar infrastructure plan, and President Biden announced his fiscal year 2022 budget of 6-trillion dollars.
The S&P 500 gained 1.2% for the week, the Dow added 0.9%, the Nasdaq advanced by 2.1%, and the Russell 2000 increased 2.4%. The US Treasury curve flattened with the 2-year note yield decreasing one basis point to 0.14% and the 10-year bond yield falling five basis points to close at 1.58%. Gold prices rose $25.40 or 1.35% to close just above $1900 an Oz. Oil prices increased over the week too. WTI prices increased 4.1% or $2.67 to close at $66.32 a barrel. Interestingly, the increase in oil prices did not translate into a good week for the energy sector, which lagged the broader market. Also of note was the volatility seen in cryptocurrencies during the week. Sharp sell-offs in the past have hindered the equity market's performance, while this week, investors dismissed the move lower.
Will inflation be transitory is the question di jour for investors. If you believe the Federal Reserve, it will be, and if you look at the most recent action in the bond market, it suggests the same. However, a narrative in the market suggests we will continue to see spikes of inflation on certain goods and services. It will, in turn, create inflation in other areas of the market, namely labor, which will eventually lead to higher interest rates. If rates do move materially higher due to increased inflation expectations, then highly valued equities and, for that matter, other high valuation asset classes may suffer. Tangible assets tend to do well in inflationary environments, think real estate and commodities. Small and mid-cap stocks also seem to do better, as do value-oriented stocks and sectors. The jury is still out on inflation, so investors will be closely monitoring the Fed and economic data.
The PCE Price Index announced this week increased 3.6% on a year-over-year basis in April- a pretty solid dose of inflation!At the same time, expected year-ahead inflation monitored by the University of Michigan's Consumer Sentiment came in at a record 4.6%.Initial jobless claims for the week continued to decline, coming in at 406k, down from the prior week's 444k.Continuing claims also continued to show improvement coming in at 3.642 million, down from the preceding week's 3.738 million.New Home Sales fell 5.9% on a month-over-month basis to a seasonally adjusted rate of 863k versus expectations of 980k.The Conference Board’s Consumer Confidence figure declined .3 to 117.2, while the consensus estimate was 118.Durable Goods orders also were a bit disappointing, coming in down 1.3% month over month versus expectations for a gain of .8%.
