The past week saw a mixed performance among major indexes as investors evaluated the impact of inflation data. The Nasdaq Composite stood out with a strong performance, boosted by Google's parent company, Alphabet, unveiling its new AI-based search platform. However, the Dow Jones Industrial Average lagged behind, primarily due to Disney's report of declining subscribers for its streaming platform, Disney+. Financial stocks also underperformed, with concerns lingering about regional banks.
Trading volumes remained thin throughout the week, reaching their lowest level so far this year, according to T. Rowe Price traders. Economic news was relatively light, but the release of inflation data garnered significant attention. The S&P 500 Index initially surged 1% in premarket trading following the Labor Department's report that consumer prices had risen 4.9% over the year, slightly below expectations and the slowest pace in two years.
While core inflation, excluding volatile food and energy prices, matched expectations with a 5.5% increase, "supercore" inflation, which measures services inflation less housing costs, rose only 0.1% for the month. This was the lowest reading in nearly three years. The Federal Reserve has acknowledged that the current inflation data doesn't fully reflect the cooling down of the housing sector due to the Labor Department's calculation methodology for "owner's equivalent rent" (OER).
Despite the data, Fed officials did not revise their inflation and interest rate expectations. New York Fed President John Williams reiterated that he did not anticipate a rate cut later this year. Market expectations for rate cuts have decreased, with investors pricing in only a 0.7% chance of rates remaining steady through the end of 2023.
The upcoming deadline to raise the debt ceiling, along with banking stresses and tightening credit conditions, added to market concerns. U.S. Treasury Secretary Janet Yellen warned that the deadline could be as early as June 1. Analysts predict a compromise deal with spending caps and a modest debt ceiling extension, although the possibility of an agreement on a topline budget cut followed by a short-term extension is increasing.
On Friday, news of an increase in consumers' inflation expectations led to a decline in stocks and a rise in bond yields. According to a University of Michigan poll, Americans expect annual inflation to reach 3.2% over the next five years, the highest level since 2011. Investment-grade corporate bonds received support from increased demand in Asia, while the high yield market was bolstered by the consumer price data.
The pan-European STOXX Europe 600 Index ended the week with marginal changes as the market absorbed the possibility of further rate hikes by the European Central Bank (ECB). Major stock indexes in France, Germany, and the UK recorded mixed results, with slight declines.
ECB President Christine Lagarde emphasized the central bank's commitment to fighting inflation while acknowledging the need for further action. Lagarde highlighted the existence of factors that could pose upside risks to inflation and emphasized the need for vigilance in addressing potential risks. Her comments echoed the sentiments expressed by hawkish policymakers following the recent rate increase.
Tomasz Wieladek, T. Rowe Price's chief European economist, suggested that the ECB could surpass the expected peak level of 3.50% for its deposit rate due to sustained inflationary pressures. Wieladek emphasized the significance of services inflation and its potential to remain elevated. However, he also noted that the ECB's decision might be influenced by the progress made in US debt ceiling talks.
Germany faced a setback as manufacturing orders unexpectedly declined by 10.7% in March, indicating the possibility of an impending recession. However, the UK managed to avoid a recession, with official data showing a 0.1% growth in the first quarter. The Bank of England responded by raising its key interest rate to 4.25%, the highest level since 2008. The central bank also revised its inflation forecast, acknowledging the stronger and more persistent food price increases than initially anticipated.
Despite these challenges, European markets remained resilient, with the STOXX Europe 600 Index showing limited changes. Investors continue to monitor the ECB's actions and their potential impact on the region's economy and markets.
Chinese equities experienced a decline in the first week after the Labor Day holiday as concerns grew about the country's economic recovery. The Shanghai Stock Exchange Index and the CSI 300 both retreated, while the Hang Seng Index in Hong Kong also declined. China's consumer price index (CPI) saw a slight increase of 0.1% in April, below economists' expectations. Core inflation remained unchanged, indicating limited demand-driven inflation. The producer price index fell more than expected, suggesting potential deflationary pressures. These data points support expectations of monetary easing by China's central bank to stimulate the economy. Additionally, trade data showed a slowdown in export growth and a larger-than-expected decline in imports, further raising growth concerns. The manufacturing Purchasing Managers' Index also contracted unexpectedly in April.
Overall, the week presented a mixed market performance as investors evaluated inflation data and kept a close watch on the debt ceiling deadline and tightening credit conditions.