Hi and welcome to PIGM Weekly Market Commentary from May 23, 2022. I'm Rich Tavis from the Strategic Investment Research Group or SIRG. SIRG is a part of PIGM, the asset management division of Prudential Financial. 

Risk off sentiment continued as investors remain skeptical that the Fed can bring inflation back down to its 2% target without tipping the U.S economy into a recession. Also, profit fears ramped up after both Walmart and Target warned of rising cost pressures from inflation and supply chain disruptions. Target also noted that consumers squeezed by rising prices are shifting spending towards lower margin categories.  

Against this backdrop, the S&P 500 was down 3% for the week with the index briefly dipping into bear market territory on Friday before recovering. This was the 7th straight weekly decline, the longest streak since 2001. As was the case in the prior week, the upward pressure on bond yields seems to be easing with the 10-year treasury yield falling 14 basis points to about 2.8%. This resulted in gains for the broad investment grade bond market, riskier high yield bonds were down for the week. 

On the inflation and rate front Fed Chair Powell was interviewed by the Wall Street Journal last week. While the interview didn't offer much in terms of new information, he did stress that the Fed remains committed to bringing inflation down and will continue to tighten financial conditions until it starts to fall in a clear and convincing way, a tone echoed by other Fed officials during the week.

He also continued to note that there are plausible pathways to a soft or soft-ish landing for the U.S economy, a sentiment that the market has become increasingly skeptical of. That being said, in the U.S the hard economic data was relatively upbeat last week. Retail sales were up in April with the control group, which strips out gas, autos, and building materials increasing by more than expected. 

The report showed that spending in stores and restaurants continued to move higher, a sign that the reopening theme continues. Also, industrial production rose by more than expected, showing broad strength across sectors with notable gains in autos and energy. 

While PMI data has been showing signs that manufacturing demand may be starting to soften, the continued improvement in the auto sector suggests that for now the impact is being offset by an easing of supply constraints. 

When you look at some of the survey-based data that came out last week, however, we saw some weakness. The Philadelphia Fed Manufacturing Index fell to the lowest level since May of 2020. The Empire State Manufacturing Index fell back into negative territory. Taken together, the data suggests a consumer that remains on solid footing and no signs of an imminent recession, but also ongoing inflationary pressure and nothing that will give the Fed a reason to back off from the current expected path for aggressive rate hikes. 

In addition, there are indications that policy tightening is starting to impact the real economy through the rate sensitive housing market. Home builder sentiment remains high, but came down in May with rising material costs and sharply increasing mortgage rates. Also, housing starts building permits and existing home sales all fell in April. 

Overseas, the year-over-year rate of inflation in the UK rose to 9% in April. This was the highest reading since this measure was introduced in 1989 and was driven by surging energy prices. High inflation is squeezing consumers in putting the Bank of England in a very difficult position. 

Finally, China cut a key lending rate by 15 basis points in an effort to boost its economy and mitigate some of the impact from COVID lockdowns and a slowing property sector. 

Turning to this week, some of the key data in focus will be markets, preliminary flash purchasing managers index data for May. Investors will be looking for signs of whether or not demand is starting to soften, as well as the ongoing impact of supply chain and inflation pressures on the global economy. This week will also bring April’s durable goods report, as well as new impending home sales. 

The minutes from the May FOMC meeting come out on Wednesday, while they will be scrutinized for clues about the path of Fed policy, the overall market impact might be limited given the fair amount of recent commentary by Fed officials, which will also continue this week. 

Finally, on Friday we will see personal income, personal consumption expenditures and PCE inflation, the Fed's preferred measure for April. 

Thank you, that's all for now and we'll be in touch again next week.