Hi, and welcome to PIGM Weekly Market Commentary for June 6, 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. 

After a sharp rebound in the prior week, both stocks and bonds finished lower last week, with the S&P 500 index down 1.2% and the 10-year Treasury yield rising 22 basis points to finish at 2.96%. The driver of markets continues to be the expected path of fed policy. 

Last week saw some of the optimism that we may be passing the point of maximum fed hawkishness fade a bit. One reason was pushback from Fed officials on the idea of a September pause in rate hikes, for example, we saw Vice Chair Brainard note that it's premature to call a peak in inflation. She indicated that while it might be reasonable to dial the hiking pace down from 50 basis points in meeting, if inflation starts to moderate, it's hard to see a case for a September pause. Similarly we saw Fed Governor Waller advocate for 50 basis point hikes until we see substantial reductions in inflation. 

Also, last week President Biden met with Fed Chair Powell at the White House on Tuesday a sign that high inflation has increasingly become a front and center political hot button issue. He reportedly told Powell that he will respect the Feds independence as they aggressively tighten policy to combat surging inflation. 

In terms of economic data updates from last week continues to suggest that the economy is softening but remains on solid footing and inflationary pressures are peaking but still elevated. It was a bit of good news for the economy - is bad news for the markets type of dynamic. 

For example, job growth in May was stronger than expected, with the US economy creating 390,000 jobs keeping the unemployment rate near historically low levels. While wage growth showed signs of moderating on a year over year basis, it remains well above the Fed's comfort level. Additionally, the JOLTS report for April continued to show job openings at very high levels, despite a bit of a drop on a month over month basis. In all, the labor market remains very tight, but pressure seems to have peaked. 

There was a similar dynamic in some of the survey-based data. The ISN Manufacturing index unexpectedly increased in May, reversing some of last month's decline. However, the pace of manufacturing activity has been decelerating since late last year. Similarly, the ISN services index remained in expansion territory, but dropped to a two year low - notably the underlying details of the report did show an easing of supply chain pressure. 

Finally, consumer confidence fell in May, but by less than expected. There were signs that rising prices and higher interest rates are curbing appetite for big ticket purchases in favor of services-oriented spending consistent with guidance from companies such as Walmart and Target in recent weeks. 

Taken together, incoming data continues to paint a picture of an economy that is still growing, but losing some steam and inflationary pressures that are elevated but starting to peak. This likely keeps the Fed on target for 50 basis point hikes at the next two meetings and does nothing to suggest a double shift is warranted. 

Turning overseas China official manufacturing and non-manufacturing PMI's, as well as the private manufacturing PMI produced by market all remained in contraction territory in May, but approved on a month over month basis and beat expectations. 

This is perhaps an early sign that China's struggling economy is starting to rebound with falling COVID cases and an easing of restrictions, including the two month lockdown with Shanghai, the world largest container shipping port. 

Elsewhere, European Union officials agreed last week to impose the phase embargo of Russian crude oil at the same time OPEC agreed to accelerate oil production which would help mitigate some of the impact. The increase in production comes ahead of a potential visit by President Biden to Saudi Arabia, a sign of some easing of U.S and Saudi tensions. Oil prices were little changed for the week, with Brent crude finishing at 100 and $21 a barrel. 

In the euro zone, inflation hit a new record high in May, with CPI increasing 8.1% on a year over year basis, putting more pressure on the European Central Bank. Regarding the ECB officials are expected to pave the way for rate hikes in the coming months at this week's policy meeting.  

Also this week, we'll get the all important May CPI in the US on Friday, which is a key decision point for Fed policymakers, a surprise in either direction could have an outsized market impact, and as of Friday, consensus expectations were for year over year core CPI to fall from 6.2% in April to a still high 5.9%. 

Finally, we'll get the preliminary reading of the University of Michigan Consumer Sentiment Index, which will provide an update on how rising prices are impacting consumers' outlook in June. 

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