Hi, and welcome to PIGM Weekly Market Commentary for May 31, 2022. I'm Matt Dingee from the Strategic Investment Research Group or SIRG. SIRG is part of PIGM, the asset management division of Prudential Financial. 

The S&P500 rallies sharply last week gaining 6.6% and snapping its seven-week losing streak. It was the biggest one week gain for the index since November of 2020. In fixed income markets, the 10-year treasury yield fell 5 basis points for its third straight week of declines, finishing at 2.74%. Falling yields provided support for investment grade bonds with the Bloomberg Aggregate Bond Index gaining 78 basis points, riskier high yield bonds registered solid gains for the week amid the risk off market sentiment. 

There were a few factors that helped support the market rally, including oversold conditions leading to some contrarian buying, reopening optimism in Shanghai, the world largest container shipping port as COVID cases reached a two-month low, and most importantly, increasing traction behind the idea that inflation may be peaking, and we may be passing the point of maximum Fed hawkishness. 

For instance, market-based measures of inflation have been falling recently, which is a welcome development and there are signs that economic growth, while still on solid footing, is starting to lose some momentum. Last week, for example, we saw more signs of cooling in the housing market as new home sales fell 17% in April missing expectations by a wide margin as higher mortgage rates and elevated prices weighed on activity. The median sales price continued to climb in April and is up over 20% over the past year. 

Also Flash PMI's from IHS market, which are a proxy for economic growth expanded at a slower rate in May. The pace of services sector activity slowed by more than expected with signs that pent up demand from the RE opening is starting to fade and consumers are increasingly being impacted by rising prices. 

On the manufacturing side, there were indications that supply chain disruptions are starting to ease, but continue to weigh on output. On a similar vein, the Richmond Fed Manufacturing index fell by more than expected in May into contraction territory.  

Durable goods orders were up in April but slowed from March, suggesting that while business spending remains solid, the underlying pace is likely slower than what we saw in Q1. Finally, Friday's personal income and spending report showed that consumption growth continued and was a bit stronger than expected in April, but did slow from the prior month. The data was consistent with some of the corporate earnings reports suggesting that while spending habits may be changing with rising prices, underlying demand continues to remain fairly strong. 

Also, in the report inflation as measured by core PCE, the Feds preferred measure was up 0.3% on a month over month basis and roughly in line with March. This brought the year-over-year rate of inflation to 4.9%. Stillwell above the Fed’s target but declining from last month. 

This is consistent with the idea that inflation, while still high, may be peaking, giving markets some hope for a less aggressive path of fed rate hikes later this year if data continues to soften. 

To that point, the minutes from the May FOMC meeting were released on Wednesday and confirmed market expectations for 50 basis point increases at the next couple of meetings but offered little in the way of new information on the path of Fed policy thereafter. 

Turning to this week, markets will be closely watching public comments by a number of Fed officials over the course of the week for clues on the path of Fed policy once they get rates back to neutral. The all-important nonfarm payrolls report for May comes out on Friday, and we will get the April JOLT report on Wednesday. Investors will be looking for any indication that the tight labor market and upward pressure on wage growth is starting to ease, a necessary condition for an eventual double shift by the Fed. 

We will also see more survey data for May including the ISM Purchasing Managers Indices, the Chicago PMI, and the Dallas Fed Manufacturing Index, as well as consumer confidence, all of which will shed more light on how inflation, the labor market, and supply chain dynamics are impacting growth. 

From overseas, we'll get PMI data for China as well as inflation and PMI readings in Europe. 

Have a great week and we'll speak again next Monday.