The Market Today
Inflation Remains the Focus
by Craig Dismuke, Dudley Carter
New York Fed Report Remains Strong in May: The Empire Fed manufacturing index remained elevated but pulled back from 26.3 to 24.3 in the first report on May activity. The new orders and shipment indices improved further. On a positive note, the delivery times index declined from 28.1 to 23.6, still elevated but welcomed evidence of slight improvement. There was no immediate relief evident in the prices paid index which rose from 74.7 to 83.5, its highest level on record. However, the 6-month forward expectation for prices paid did pull back from 71.2 to 67.1.
Builder Sentiment: The May homebuilder confidence index is expected to tick down from 83 to 82, remaining very high in an historical context.
Fed Communuications: Fed Vice Chair Clarida (9:05 a.m. CT), Atlanta Bank President Bostic (9:25 a.m.), and Dallas Bank President Kaplan (5:00 p.m.) are all scheduled to speak today. The theme from last week’s deluge of communications was clear: 1) the disappointing jobs report is expected to be temporary, 2) the rise in inflation is expected to be mostly transitory, and 3) now is not the time to discuss changing policy.
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Global Equities Continue to Struggle and Sovereign Yields Remain Higher after Last Week’s CPI Scare Stirred Inflation Debate
Not surprisingly, last week’s hotter-than-expected U.S. CPI inflation remains a topic of discussion among market commentaries on Monday as global shares struggle. The inflation data kicked off a bout of selling on Wednesday that was only partially unwound by the weekend, handing the S&P 500 its worst weekly decline since February (more below). After solid gains on Thursday and Friday, U.S. futures were pointing to a weaker open, mimicking moderate declines across Europe that followed a mixed day of trading in Asia. While U.S. virus cases have continued their drastic improvement, other countries have been less fortunate. Taiwanese stocks tumbled a global-worst 3% in response to new restrictions to address a nascent rise of infections. Chinese stocks rose despite a 17.7% YoY jump in retail sales coming up short of expectations in April. At 7:15 a.m. CT, Europe’s Stoxx 600 was 0.4% lower while U.S. futures were trading down 0.5% at session lows. Treasury yields had posted small gains that trailed larger increases across Europe. Germany’s 10-year yield added another 1.9 bps to -0.11%, the closest it’s been to positive territory in two years. The 10-year Treasury yield was 0.9 bps higher at 1.64%.
ICYMI – May 14, 2021 Weekly Market Recap: Yields rose last week after CPI inflation jumped more sharply than expected in April, the first real test of investors’ and Fed officials’ wills to calmly respond to unusually large annual gains for inflation that are expected this summer. Because April 2020 represented the low points of the pandemic for several inflation metrics, simple mathematics will artificially inflate YoY calculations, a known occurrence referred to as base effects. However, the April CPI results also showed strong monthly gains, unrelated to those base effects, as several categories saw prices rise sharply amid economic re-opening. Supply chain disruptions drove auto prices higher and a resumption of economic activity in the services economy drove the cost of airfare, hotels, and car rentals higher; those three categories are still depressed relative to pre-pandemic levels. Longer yields shot higher despite a top Fed official saying that while he was surprised by April’s strength, he still expected the pressures to prove transitory. That was a common refrain in public remarks of an army of his colleagues that spoke prior to the inflation data. The labor market’s recovery has continued based on another improved jobless claims report after a separate release (before the CPI data) showed a record number of job openings. Data Friday showed retail sales were unchanged at a high level in April after a stimulus-driven surge in March. The optimism was countered somewhat by an unexpected decline for consumer sentiment in early May that also showed consumers were eyeing the possibility for firmer inflation. With worries about inflation heating up, the 10-year yield rose 5.1 bps to 1.63% and the S&P 500 stumbled 1.4%. Click here to view the full recap.