Market Pulse

In focus

Investors are focused on the two components of the Federal Reserve’s (Fed) dual mandate -employment and inflation. Progress and setbacks in these two areas are shaping participants’ expectations for rate hikes. Two developments last week suggest the Fed will sustain its aggressive tightening plans.

The May jobs report was released showing a gain of 390,000 jobs during the month. This figure was stronger than the anticipated 320,000 and the unemployment rate was unmoved at a low 3.6%. The strength in the jobs market was broad-based among all major industries except retail. As we have written, the retail industry’s weakness may be more a function of over-hiring during the pandemic and historically low quit rates. What investors saw in the report was a jobs market that will give the Fed little reason to pause.

At the same time, inflation continues to run hot and oil prices and the broader energy markets weigh heavily as their impact can be systemic. False relief was in the headlines last week as OPEC members pledged an increase in production to offset what is likely to be an EU embargo on 90% of Russian oil, pending final negotiations. However, the increase in production is mostly a pull-forward from previously planned increases scheduled for the Fall. Additionally, the increase pales in comparison to the likely effect of the embargo – 650 kb/d OPEC increase vs. 3.4 mb/d estimated loss via embargo. As a result, the price of crude oil extended its rise and should continue to weigh heavily on inflation. Ultimately, we expect inflation to fall from its elevated readings though settle above pre-pandemic levels. 

A look back

• Major U.S. stock indices fell during the holiday-shortened week, with the S&P 500 declining -1.2%. Emerging market stocks were a bright spot increasing 1.8%, while international developed markets fell -0.3%.
• The Bloomberg Aggregate Bond Index lost -0.9% on the week as 2-year and 10-year U.S. Treasury yields both increased by 0.19%. The 10-year yield finished the week at 2.94%.
• May payrolls increased by 390,000 outpacing the consensus estimate of 320,000. The unemployment rate was unchanged at 3.6%.

A look ahead

• Investors will be focused on May’s inflation report on Friday for signs on whether inflation is peaking and what it means for Fed policy.
• Initial jobless claims will be released on Thursday. While this data is released weekly, it tends to be a leading indicator. Economists are beginning to watch more closely for signs of a slowing economy and cooling labor market.
• Economic releases: Wholesale Inventories, Jobless Claims, Consumer Price Index, University of Michigan Sentiment.