Market Commentary — June 13, 2022
The market was hoping for some sign that inflation was abating, but instead, the May CPI number of 8.6% came in hotter than expected, even higher than April’s 8.3% reading. Core CPI, ex-food, and energy climbed 6% which was also higher than estimated. Going into the week, the Fed was expected to raise interest rates by half a point (50 bps), but after Friday’s hot number, some are now pricing in a three-quarter point (75 bps) hike.
One interesting consumer data point during the week was retailer Target guiding down profits for the second time in three weeks as it struggles to keep up with a sudden shift in demand away from home goods and electronics into categories such as beauty, grocery, and apparel.
I had the pleasure of meeting up with my old colleague Kristina Hooper, now the Chief Global Market Strategist for Invesco. She suggests higher rates and inflation is not causing demand destruction but rather “demand delays and demand discretion.” Unlike other past inflationary periods, consumers believe that prices will not remain elevated for long. While consumers appear willing to hold off on some physical purchases, service segments like travel and dining remain strong.
We question the Fed’s ability to tame inflation by raising interest rates or trimming their balance sheet without spurring a recession, but still, hold out some hope for a “softish” landing. Maybe we won’t avoid a recession entirely, but given the underlying strength of the economy, perhaps it will be short-lived.
In ETF news, another firm is being investigated for alleged “greenwashing” – this time Goldman Sachs. Flows into government bond ETFs surged to a record high in May, as investors pivot to low-risk assets. Also benefiting from the “flight to quality” is a value relative to growth on the equity side, although during Friday’s sell-off not much was spared. Gold ETFs experienced their third month of inflows, with AUM rising 10% through May.
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