U.S. stocks rose last week. Mostly it was on the good news that the Fed would hit the pause button on interest rate increases for now. Indexes dropped initially when investors dug into the details of the announcement. The central bank actually seemed to contradict itself when its released statement noted: “Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.”

However, the pause might be short-lived. Wording in the hawkish statements by the Fed shows their higher rate path may not be over. Chairman Powell hinted that skipping another increase in June would appease some members and be offset by an additional 0.25% rate increase at their July meeting. Analysts now expect the federal funds rate to peak at 5.5% – 5.75% this year. That means the Fed doesn’t believe its job is over yet.

The chart below from the Commerce Department shows the difference in the Fed’s favored tool for inflation forecasting, the Personal Consumption Expenditures Price Index (PCE). You can see the slight shift on the red line that shows an increase in the expectation of higher prices at the end of 2023 and through 2024 and 2025. This caused 12 of 18 Fed officials to take a more hawkish stance on higher rates later this year.

Although at a snail’s pace, inflation is coming down. Industrial production declined in May after rising the two prior months. The Consumer Price Index (CPI) rose 4% last month. That may still be high, but it’s a stark improvement from April’s 4.9% increase and last year’s peak of 9.1%.

The jobs market may finally be cooling off too. The 262,000 weekly jobless claims came in higher than estimates and above the previous weeks count of 250,000 jobless claims. Only time will tell.

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The Markets and Economy

• Global economies are out of sync. The eurozone is raising interest rates, China is cutting them, while the S. central bank has hit the “pause” button for now. The reasons are varied. Europe is still facing higher inflation. China is pulling out all the stops to stimulate a sagging economy after exiting extreme lockdown measures over Covid concerns. And the U.S. central bank is not really sure if the previous 10 interest rate increases are enough to bring inflation down to the 2% target the Fed has set.
• The war in Ukraine is causing a severe labor shortage in Russia. 300,000 men were sent to fight in the war. More fled the country with their families to avoid Putin’s conscription enforcement. Once drafted, you are foridden to leave the country. The lack of human capital is dealing another blow to the Russian

• Early on during the pandemic, tech companies were at the forefront of embracing remote working. Now, companies like Meta Platforms (Facebook) Salesforce, Lyft and Alphabet (Google) are requiring a return to the office–whether employees like it or not. With layoffs growing, tech companies feel they have more leverage over their employees.
• Beijing is planning major steps to help revive the country’s sluggish economy. Some of the possible actions involve billions of dollars in new infrastructure spending and looser rules to encourage property investors to purchase more homes.
• Over the last few years, major corporations jumped on the environmental, social, and governance (ESG) bandwagon, touting commitments to new programs. Now, many are now pulling back. FactSet noted a 23% reduction in ESG announcements during recent earnings calls.
• Retail sales rose 0.3% in May. That comes on top of April’s strong 0.4% gain. Many analysts believe a recession is in our future. If it does happen, the U.S. economy will go kicking and screaming.

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The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.

Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

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