Weekly Market Vibes

Benchmarks end mixed as investors weigh inflation data

The major indexes ended mixed for the week as the flow of first-quarter earnings reports neared its end. The technology-heavy Nasdaq Composite outperformed, helped by a surge in Google parent Alphabet following the unveiling of its new artificial intelligence-based search platform. The narrowly focused Dow Jones Industrial Average lagged, weighed down by Disney, following its report of a decline in subscribers to its streaming platform, Disney+. Financials stocks underperformed, dragged lower by ongoing concerns over the strains facing certain regional banks.

The week’s economic calendar was relatively light overall but included highly anticipated inflation data. On Wednesday, the S&P 500 Index jumped 1% in premarket trading after the Labor Department reported that headline consumer prices had risen 4.9% over the year ended in April, a tick below consensus expectations and the slowest pace in two years.

“Supercore” inflation falls to lowest level since early in the pandemic

Core inflation, which excludes volatile food and energy prices, was in line with expectations over the period, rising 5.5%. However, “supercore” inflation, which, depending on the definition, measures services inflation less housing costs and is rumored to currently be the Federal Reserve’s preferred gauge, rose only 0.1% for the month—the lowest reading in nearly three years, according to Reuters. Fed officials have acknowledged that the Labor Department’s methodology for calculating “owner’s equivalent rent” (OER) means that the cooldown in the housing sector is not fully reflected in current inflation data.

Fed officials did not seem to moderate their inflation and interest rate expectations in reaction to the data, however. In stark contrast to the three rate cuts priced into futures markets by January 2024, New York Fed President John Williams repeated on Wednesday that he did not expect a rate cut later this year. According to the CME FedWatch Tool, as of the end of the week, investors were pricing in only a 0.7% chance that the Fed would keep rates steady through the end of 2023—although this was up a bit from the 0.1% chance the week before.

Along with banking stresses and tightening credit conditions, another factor weighing on sentiment seemed to the upcoming deadline to increase the debt ceiling—the statutory limit on federal government borrowing—before the U.S. Treasury Department has exhausted its “extraordinary measures” to pay the government’s obligations. U.S. Treasury Secretary Janet Yellen has warned that the deadline could come as early as June 1.

Debt ceiling extension possible, but only with strings attached

News on Friday of a jump in consumers’ inflation expectations seemed to drive stocks lower and bond yields higher, reversing a decline through much of the week. Americans polled by the University of Michigan expected annual inflation to run at 3.2% over the next five years, the highest level since 2011. Investment-grade corporate bonds received some support over the week from an uptick in demand from Asia, according to our traders, while the consumer price data supported the high yield market.

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