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Sightline Weekly Market Update: Fed Comments on Inflation Spook Markets

The market tranquility of range-bound equity indices appeared a little shaken after the US Fed meeting on Wednesday and after comments by Fed member James Bullard on Friday morning before regular trading hours. The TSX ended the week down only 61 basis points as oil gained 1% during the week helping support energy stocks. Both energy and financials came under pressure on fears that the Fed will raise rates sooner than anticipated. The Dow came under extreme pressure losing 3.45% on the week, with many cyclical names in the index retreating on expectations of slowing growth. The broader-based S&P 500 posted a 1.91% loss on the week. While losing 28 basis points during the week, the NASDAQ held up surprisingly well as growth stocks outperformed the value stocks. The S&P400 MidCap index and the Russell 2000 both suffered the most significant decline losing 5.10% and 4.20%, respectively, as small caps fell more than large caps. European equity markets were also impacted by the Fed meeting, with most falling over 1% in the week except the French CAC 40 dropping just .48%.

On Tuesday, the US Census Bureau reported retail sales and food services for May were down 1.3% from April. Sales of autos contributed to the decline as automakers facing global shortages of computer chips could not produce enough vehicles to meet demand. Sales of services, and sales at bars and restaurants in particular, jumped 1.8% over April for the third month of improvement.1 Also, on Tuesday, industrial production was reported 0.8% higher than last month compared to estimates of a 0.5% gain. Production of autos and auto parts jumped 6.7% in May after a 5.7% decline in April. Factory production ex-autos increased 0.9% in May over a revised 0.1% decrease in April.2 Initial jobless claims reported on Thursday jumped to 412,000 from the previous week’s 375,000 and higher than the consensus view of 360,000. California and Pennsylvania accounted for almost all the increases. Continuing claims remained stable at 3.52 million, well ahead of the 18 million a year ago.3

On Wednesday, the market anxiously awaited the Federal Reserve Chairman Jerome Powell’s comments and press release from the Federal Open Market Committee’s meeting. The first since the most recent inflation data indicating inflation well above target, jumping the most in over two decades and employment improving but well under pre-pandemic levels. The Chairman’s response to inflation until this meeting was that inflation was transitory as economic activity resumes unevenly, creating pricing pressures due to temporary production shortages in critical components and a rebound in spending. The response to these pressures caused the FOMC members to raise their expectations for inflation. Chairman Powell recently commented, “As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal. And the median inflation projection falls from 3.4% this year to 2.1% next year and 2.2% in 2023.” 4

The Fed policy response was no change to rates and to maintain asset purchases at current levels. The equity market reaction to the Chairman’s ever-so-slightly hawkish comments were negative in anticipation of future rate increases coming earlier than some market participants thought. On Friday morning, comments from the St. Louis Fed President James Bullard spooked the market even further. He said he felt an initial interest rate increase could happen as early as late 2022, with inflation picking up faster than forecasts anticipated compared to the consensus view that rates would hold until 2023. 5

Any mention of higher rates and tapering of asset purchases by the Fed has caused market anxiety. The memory of the 2013 “taper tantrum” experience and the ensuing equity 5.8% market correction in less than a month cause concern considering the frailty of current economic recovery, without massive “warlike” monetary and fiscal stimulus. At some point, the accommodative monetary policy and fiscal response will end, and the question will be: Is the economy strong enough to prevent a full-blown recession or worse? In the meantime, the market will continue to bounce along as the recovery gains momentum.

 

 

Sources:

1 https://www.marketwatch.com/story/retail-sales-fall-in-may-as-stimulus-fades-but-the-u-s-economy-is-still-primed-for-fast-growth-11623761214?mod=economic-report

2 https://www.marketwatch.com/story/u-s-industrial-output-rebounds-in-may-led-by-autos-11623763786?mod=economy-politics

3 https://www.cnbc.com/2021/06/17/us-weekly-jobless-claims.html

4 https://www.rev.com/blog/transcripts/fed-chair-jerome-powell-press-conference-transcript-june-16-market-update

5 https://www.cnbc.com/2021/06/18/feds-jim-bullard-sees-first-interest-rate-hike-coming-as-soon-as-2022.html

 

 

Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). Sightline provides management and investment advisory services to high-net-worth individuals and institutional investors primarily through fee-based accounts.

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