Weekly Market Update

While segments of the U.S. economy are showing signs of stress, such as the real estate market, on the whole the economy continues to defy gravity. Case-in-point, the ISM Services Index jumped to 54.5% last week (any value over 50% indicates expansion), delivering the eighth straight month of gains in the service sector and crushing economist's expectations of 52.5%. The U.S. consumer continues to spend on services despite high interest rates, growing debt levels, and depleted savings. (Source: MarketWatch) The Treasury yield curve has been inverted since July 2022. Historically, yield curve inversions have coincided with eight of the past ten recessions, yet the heavily anticipated 2023 recession has yet to arrive. Since July of this year, when the spread on 2-year and 10-year Treasuries reached a level not seen since 1981 (-1.08%), the yield curve has been steepening. This is welcome news, as stronger-than-expected economic growth data has driven longer-term yields higher. However, the yield curve remains inverted as 2-year Treasuries are yielding 4.98% while 10-year Treasuries offered 4.26% as of Friday's close. (Source: The Wall Street Journal)

The U.S. economy continues to forge ahead in the face of +5% interest rates set by the Federal Reserve. In the past few weeks, we've seen an upward revision to first quarter GDP From 1.3% to 2%, driven by consumer spending, and multiple employment reports that show the labor market remains healthy despite early signs of potential weakness. (Source: CNBC) The Fed's preferred measure of inflation, PCE, continues to moderate while still nearly double the Fed's 2% target, coming in at 3.8% for May. The Fed's continued emphasis on reining in inflation, combined with a stronger-than-expected economy, has increased the probability of another 0.25% July interest rate hike to 93% at the time of writing. (Source: The Wall Street Journal, CME FedWatch tool)

Geopolitics took center stage last week as a Russian-hired, 25,000-troop mercenary force known as the Wagner Group embarked on Moscow after tensions grew between Putin and Wagner's leader, Yevgeny Prigozhin. The Wagner Group seized the Russian city of Rostov-on-Don and shot down six Russian helicopters on their path towards Moscow before an agreement was reached. The incident heightens concern of instability in Russia and raises questions whether the highly effective Wagner Group will continue fighting alongside Russian troops in Ukraine. (Source: The Wall Street Journal)

Weekly Market Review Jerome Powell and the Federal Reserve paused the most aggressive rate hiking cycle in 50 years last week following continued improvement from May's inflation report; headline CPI is at a two-year low (4%) while core CPI, which excludes volatile energy and food prices, fell to its lowest level since November 2021. However, further rate hikes in 2023 are not out of the question; of the 18 fed officials surveyed, the median estimate was that rates would need to rise between 5.5% and 5.75% this year, suggesting two additional 0.25% rate hikes this year. (Source: Edward Jones)

Equities advanced last week on optimism of a potential debt-ceiling agreement, leading to the S&P 500 Index returning just under 10% so far in 2023. Despite a near-double digit return from the S&P 500 Index, the S&P 500 Equal Weight Index has returned just 1.7% this year. Why the difference? This year's stock market performance has been primarily driven by a narrow segment of mega-cap tech companies, who most recently have benefited from the hype around artificial intelligence. The top ten companies in the S&P 500 Index, seven of which are tech companies, currently make up over 30% of the index. (Source: TDAmeritrade)

The disinflation trend continued for the 10th consecutive month in April as the Consumer Price Index (CPI) came in at 4.9%, down from 5.0% in March. While still above the Fed's 2% target inflation rate, the Fed is expected to pause their interest rate hikes after raising the fed funds target range between 5% and 5.25%, a 16-year high. With the pause, the Fed appears to be shifting their focus to the banking sector turmoil and the impact of tighter lending conditions on the economy. (Source: The Wall Street Journal)

The U.S. labor market added 253,000 jobs in April which brings the unemployment back down from 3.6% to 3.4%, matching the lowest reading since 1969. The stock market reacted favorably to the strong employment data, a potential shift in the "good news is bad news" narrative that has driven markets over the past year as the Federal Reserve fights persistent inflation. (Source: The Wall Street Journal)