Consumer spending and personal income remain steady, suggesting the Fed will continue to worry more about inflation than recession.
The Week That Was
Friday’s report on April spending and income did not indicate either a downturn in the economy or significant progress in lowering inflation.
April consumer spending was up at a 10 percent annual rate from March, and at a 5½ percent rate from the first quarter. The monthly increase in wages and salaries was at a 6 percent rate from March, and a 4½ percent rate from the first quarter.
Both core inflation (ex-food and energy) and total consumer inflation were in the 4 percent to 5 percent range.
Nothing in these April data will convince Federal Reserve Board members inflation is being contained.
In another sign of strength, April new orders for durable goods increased sharply, both the total and without defense and transportation orders.
S&P’s advanced survey of May business conditions shows “a solid and faster expansion in
private sector business activity.” The survey reinforces the view that demand and growth remained strong in May. The most optimistic finding in the report was an indication that
inflationary pressure was subsiding.
Weekly initial unemployment data were down slightly. There are no signs of problems in the labor market. It remains tight. All who want work are working.
Things to Come
Thursday’s ISM May business survey is likely to show manufacturing activity remains close to break-even (50), where it was in April.
Friday’s job report should show a continuation of strong increases of 200,000 or more in private-sector jobs. The lack of an increase in unemployment claims along with business surveys points to another month of decent job growth.
Money, Money, Money
Interest rates rose significantly, particularly short-term rates.
At one point the yield on the 10-year T-Note reached 4 percent, before dipping back to 3.8 percent.
The real action was at the short end of fixed-income securities. The one-year T-bill had been below the fed funds rate, signaling expectations of a near-term cut in the fed funds rate, which isn’t happening.
The past few weeks the yield on one-year Tbills rose to 5¼ percent as expectations that another hike in the fed funds rate was coming at the Fed’s June meeting.
Most conventional economic numbers continue to show the economy growing. The Fed of Atlanta estimates real growth in the current quarter is close to 2 percent.
Despite curretn signs the economy is growing, look for monetary restraint to create a downturn in the second half of this year. This weakness should keep short-term interest rates close to current levels. Although short-term rates are close to a peak, they are likely to remain high in response to the Fed’s ongoing effort to contain inflation.
Market Forces
Stock prices were mixed this week. The Nasdaq rose 6 percent on the heels of NVIDA’s earnings release. The S&P500 gained ½ percent and ended slightly above this year’s 3,900 to 4,200 trading range.
The gains in both the Nasdaq and S&P were impressive given the rise in interest rates.
With stock prices at the upper end of this year’s trading range, and with the likelihood of interest rates moving higher, the potential exists for at leasta temporary downward move in stock prices.
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Outlook
Economic Fundamentals: negative
Stock Valuation: S&P 500 overvalued by 11 percent
Monetary Policy: restrictive