Market Perspective

Focus on Inflation


Overview: Over the past week, there was little news to cause investors to change their outlook for inflation or future Federal Reserve policy. Still, mortgage rates ended the week higher.

 

The Personal Consumption Expenditures (PCE) Price Index is the inflation indicator favored by the Fed, and the most recent reading was right on target. In April, core PCE was 4.9% higher than a year ago, matching expectations, and down from an annual rate of 5.2% last month. While this marked the second straight month of declines, inflation remains high. For comparison, the annual rate of increase was below 2% during the first three months of 2021. One of the big questions for investors is how quickly inflation will moderate as disruptions relating to the pandemic and the conflict in Ukraine are resolved.

A significant economic indicator released this week by the Institute for Supply Management (ISM) remained at a high level by historical standards. The national manufacturing index for May rose to 56.1, and levels above 50 indicate that the sector is expanding. Investors are watching to see how much consumer spending is shifting from goods to services.

The latest data from the Job Openings and Labor Turnover Survey (JOLTS) report indicated that the labor market remains very tight. At the end of April, there were a massive 11.4 million job openings, down from last month's record high, and over 4 million more than in January 2020 prior to the pandemic. A high level of job openings reflects a strong labor market, as companies struggle to hire enough workers with the necessary skills. A very large number of employees also willingly left their jobs in April. This is viewed as a sign of labor market strength as well, since people usually quit only if they expect that they can find better jobs.


Week Ahead


Looking ahead, investors will continue to monitor news about Ukraine and COVID case counts in China. In addition, investors will look for additional guidance from Fed officials on the timing for future rate hikes and bond portfolio reductions. Beyond that, the monthly Employment Report will be released on Friday, and these figures on the number of jobs, the unemployment rate, and wage inflation will be the most highly anticipated economic data of the month. The ISM Services Index also will come out on Friday.

 

Core PCE (annual % change)