Hi, and welcome to PIGM Weekly Market Commentary for June 13, 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.  

Last week, all eyes were on the highly anticipated May CPI report, which came in hotter than expected. Headline inflation was up 97 basis points from the prior month, bringing the year-over-year change to 8.6%, a 40-year high, driven in part by higher energy costs. Core CPI, which strips out the volatile food and energy categories, was up 60 basis points month over month, but higher than markets were expecting.  

While the year over year change in core inflation did fall from last month the still high May print suggests that price pressures are not rolling over quickly enough for the Fed to slow down the pace of rate hikes in September. In fact, Fed fund futures are now pricing in an even more aggressive fan in terms of the potential for either a 75-basis point hike in June or July or a longer string of 50 basis point hikes than was previously expected. 

In other central bank news, we saw a continued hawkish shift from the European Central Bank in the face of surging inflation. As anticipated, the ECB, at its June monetary policy meeting, confirmed its intention to hike interest rates for the first time in 11 years and end its bond buying program at next month's meeting. They also downgraded their forecasts for European economic growth while increasing projections for inflation. They signaled a 25-basis point increase in July and noted that they intend to raise rates again in September, followed by a gradual but sustained path of ongoing increases. 

The announcement put upward pressure on global bond yields and left the door open for a larger 50 basis point hike in September if warranted. The hawkish backdrop led to renewed concerns that Fed tightening could ultimately tip the economy into a recession. Equity markets sold off sharply with the S&P 500 index, declining 5% its worst weekly return since January. All sectors finished in negative territory, but defensive oriented consumer staples, healthcare and utilities held up better than the broad market. In fixed income treasury yields face upward pressure across the curve given the hotter than expected CPI print and rising odds of an even more aggressive fed, the 10-year yield climbed 20 basis points to finish the week at 3.16%, its highest level since 2018. 

With yields rising sharply, investment grade bonds struggled, and the Bloomberg Aggregate Bond index declined 1.5%. Riskier high yield bonds were down more than 2% amid the risk off sentiment.  

In other economic news from last week, the preliminary reading of the University of Michigan Consumer Sentiment Index fell much sharper than expected, falling eight points to a new record low of 50.2. The report highlighted that consumers assessments of their personal financial situation worsened due to inflation, particularly high gas prices, which could negatively impact future spending habits. 

Turning to this week, a busy week- all eyes will be on Wednesday, June FOMC meeting. Investors still widely expect the well telegraphed 50 basis point hike, but investors will be looking to the so-called dot plot economic projections and Chair Powell's comments during the post meeting, press conference for clues about the path of rate hikes past June. 

On the inflation front, we'll see May’s Producer Price Index, which is expected to remain very high but have peaked on a year over year basis. 

On the activity side, we'll get the Empire State and Philly Fed manufacturing indices for June, as well as retail sales and industrial production for May. 

We'll also get the NAHB housing market index for June and building permits and housing starts for May, which will be watched for more signs of cooling in the housing markets, which is one of the first sectors impacted by rising rates. 

Finally, turning overseas, the focus will be on monetary policy meetings in the UK and Japan, and CPI data in the euro area. 

That's all for now, but we'll speak again next week.