Stocks appear set to open on the upside this morning, considering activity in the futures markets. The Bureau of Labor Statistics reported that April import prices advanced 0.4%, month to month, compared to a 0.2% decline previously. Excluding volatile fuel prices, the index showed a slight monthly contraction of 0.1%, less so than the 0.5% pullback in March. Notably, the price index was down 4.8%, year on year, compared to a 4.6% decline in March. Shortly, the University of Michigan will release its preliminary survey of consumer sentiment for May. It’s expected to come in one-half point shy of the April level of 63.5. These figures lend credence to the consensus view on Wall Street that inflation and consumer activity are easing.
Earlier this week, both the consumer price index and the producer price index indicated a modest slowing in the overall inflation trend. Also worthy of note, initial jobless claims and continuing jobless claims ticked higher, suggesting a slackening in demand for employees. That could result in a further softening of wage growth. Furthermore, during this week, additional stress appeared in the regional banking sector, with PacWest Bancorp (PACW) reporting significant deposit outflows. This, along with difficult debt-ceiling talks between the White House and Congress, raised uncertainty and concern among investors. Through Thursday’s close, the blue-chip Dow Jones Industrial Average (DJIA) was down 1.1%, the broader Standard & Poor’s 500 Index (S&P 500) was holding steady, and the tech-heavy NASDAQ Composite was up a modest 0.8%. Overall, the markets seem likely to finish the week on a mixed note.
Next week, new April and May data on manufacturing, retail sales, industrial production, capacity utilization, housing, employment, and leading economic indicators will stream in. The Federal Reserve will be closely monitoring trends in this data, while continuing to maintain a watch on the banking industry. Over the past year, the Fed has aggressively raised short-term interest rates from near zero to the 5.00%-5.25% range in an effort to rein in goods and services inflation, as well as wage gains. Currently, the bond market is implying that interest rates will decline by year end, as reflected in high short-duration security rates and lower long-duration rates. Fed Chair Jerome Powell has pushed back against this assumption. Mr. Powell seems inclined to at least hold rates steady, possibly until the start of 2024. We note that if inflation does not fall to the central bank’s 2% annual target by the end of 2023, there is conceivably the risk of additional hikes, which would bode ill for share prices. The Fed’s next rate-setting meeting is scheduled for mid-June.
At this juncture, we believe a pause in the Fed’s inflation-fighting strategy appears most likely. Lagging cost-of-housing data, once in, could well point to a more substantial easing of inflation than is currently apparent. Too, generally moderate stresses in the banking sector will probably drag on over the next several weeks, if not months. Commercial and consumer lending may become challenged, pulling down broader economic activity. Though we don’t expect it, a severe weakening of the domestic economy could prompt the Fed to quickly reverse course and cut rates. Serious foreign political events, involving, for example, Russia, China, Iran and North Korea, would pose added considerations for central bank policy.
So far this year, the NASDAQ has performed better than the DJIA and the S&P 500. Many investors have turned to large-cap tech issues, namely Apple (AAPL), Amazon.com (AMZN), Alphabet (GOOG), Meta Platforms (META), and Microsoft (MSFT), which offer decent downside protection, as well as good growth potential if the economy weathers the current challenging situation better than expected. This, in our view, is a prudent strategy for the time being.
At the time of this article’s writing, the author did not hold any positions in any of the companies mentioned.
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