Market Update—Week of May 22, 2023

Market Update—Week of May 22, 2023

May 23, 2023

Quick Hits

  1. Report releases: Year-over-year consumer and producer inflation slowed in April
  2. Financial market data: Banks continued their volatility amid high short-term yields
  3. Looking ahead: Retail sales and housing data will provide insight into economic health

Report Releases: May 15–19, 2023

Retail Sales, April (Tuesday)

Retail sales rebounded in April following two consecutive months with declines. The core retail sales figure, which strips out the impact of volatile gas and auto purchases, came in well above expectations.

  • Expected/prior month retail sales monthly change: +0.8%/–0.7%
  • Actual retail sales monthly change: +0.4%
  • Expected/prior month core retail sales monthly change: +0.2%/–0.5%
  • Actual core retail sales monthly change: +0.6%

Industrial Production, April (Tuesday)

Industrial production increased more than expected in April, in part due to a rise in capacity utilization during the month. Manufacturing production also increased more than expected.

  • Expected/prior month production change: +0.0%/+0.0%
  • Actual production change: +0.5%

Housing Starts and Building Permits, April (Wednesday)

Housing starts and building permits came in mixed in April, with starts up and permits down modestly. Overall, the pace of new home construction remained well below the recent peak that we saw in 2021.

  • Expected/prior month housing starts monthly change: –1.4%/–4.5%
  • Actual housing starts monthly change: +2.2%
  • Expected/prior month building permits monthly change: 0.0%/–3.0%
  • Actual building permits monthly change: –1.5%

Existing Home Sales, April (Thursday)

The pace of existing home sales slowed more than expected in April, marking two consecutive months with slowing sales growth. The annualized rate of sales ended the month at 4.28 million, well below pre-pandemic levels.

  • Expected/prior month existing home sales monthly change: –3.2%/–2.6%
  • Actual existing home sales monthly change: –3.4%

The Takeaway

  • Stronger-than-expected retail sales and industrial production point to an economy that may be more resilient than expected
  • Not every area of the economy is displaying strength; real estate, for example, is clearly showing signs of slowing

Financial Market Data

Equity

IndexWeek-to-DateMonth-to-DateYear-to-Date12-Month
S&P 5001.71%0.67%9.91%9.43%
Nasdaq Composite3.08%3.63%21.37%12.15%
DJIA0.50%-1.77%1.69%9.27%
MSCI EAFE0.36%-1.16%11.35%11.93%
MSCI Emerging Markets0.51%0.16%2.94%-0.79%
Russell 20001.93%0.38%1.27%1.40%

Source: Bloomberg, as of May 19, 2023

Technology stocks led the way last week as Microsoft (MSFT), Nvidia (NVDA), and Alphabet (GOOGL) all continued their rally as AI continues its push out into the public following the Google I/O event. Financials also fared well amid waning regional bank concerns. JP Morgan Chase (JPM) was up more than 3.7 percent. Sectors that were more challenged included utilities, consumer staples, and real estate, which all showed signs of waning from 2022 levels.


Fixed Income

IndexMonth-to-DateYear-to-Date12-Month
U.S. Broad Market-1.65%1.88%-2.10%
U.S. Treasury-1.50%2.00%-2.51%
U.S. Mortgages-1.51%1.50%-2.94%
Municipal Bond-0.78%1.75%3.92%

Source: Bloomberg, as of May 19, 2023

The 1-month U.S. Treasury yield fell 16.7 basis points (bps) last week (to 5.51 percent). This comes despite debates over the debt ceiling. The move of note was the increase in the 6-month Treasury yield, which climbed nearly 20 bps as we saw equity markets rally. Despite the lift in 6-month yields, the yield curve remained meaningfully inverted with the 10-year yield minus the 3-month yield closing the week inverted by 1.57 percent. Investors will keep an eye on both inflationary and economic data to see if this lift can extend its way out further on the yield curve.

The Takeaway

  • AI stocks continue to drive the recent rally as the technology extends into additional areas
  • A large shift in the front end of the yield curve indicates that bond investors expect a fairly significant shift in the economy over the coming months

Looking Ahead

Investors will look to S&P Global U.S. Composite Purchasing Managers’ Index (PMI) and the Federal Reserve (Fed)’s May meeting minutes for an indication of business sentiment and a monetary policy outlook.

  • The week will kick off on Tuesday with the S&P Global U.S. Manufacturing and Services PMI reports for May. The April PMI reports showed manufacturing and services PMI of 50.2 and 53.6, respectively, slightly in expansionary territory.
  • This will be followed on Wednesday with the Federal Open Market Committee (FOMC) meeting minutes for May. Economists and investors will be closely examining the meeting minutes to see if the central bankers discussed the path forward for interest rates given the progress in lowering headline inflation so far this year.
  • Finally, Friday will see the release of personal income and spending reports for April. The durable goods data will also be released. The April personal income and spending reports are both set to show growth during the month after experiencing mixed results in March. Both headline and core durable goods orders are set to fall in April, which would signal slowing business investment to start the second quarter.


Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.

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Authored by the Investment Research team at Commonwealth Financial Network.

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