We’ll start with the easy stuff this week, the Philly Fed’s regional manufacturing index came in at 17.6 for April, below expectations for a 21.9 reading (any number above 0 in this index is reflective of a growth environment). While companies are still expecting growth over the next six months, sentiment seemed to be slightly cooling on a few components of the index like current activity, new orders, and shipments. On the other hand, there were increases to the employment and price components. The employment indicator that’s part of this index reached an all-time high last month and the price component reached the highest reading since June 1979. Looking forward, businesses in the region are expecting costs to increase 10-12.5% for raw materials, 7.5-10% for energy, and 5-7.5% for compensation.
Moral of the story: Inflation is still plaguing businesses but employment remains strong (last week’s jobless claims remain subdued at only 184k). That strong labor market is the key to our economy being able to survive this inflation and the upcoming policy changes to bring it lower.
All eyes are on the Federal Reserve as they try to implement policy in response to inflation. Remember, the Fed’s two jobs are keeping prices in check (average inflation of 2%) and promoting full employment. Expectation had been for the central bank to raise policy interest rates by 0.50% during the upcoming meeting in May, and that was confirmed by Chair Powell’s commentary for the IMF this past week.
Moral of the story: The central bank seems to be determined to be aggressive in adjusting policy to combat inflation, and seems determined to do it sooner than later. Historically, this has pushed the economy into recession. But if they raise rates aggressively now, it means they have the ability to also cut rates in the future if they need to give the economy a little boost after inflation comes back down to earth.
Earnings season continues
This week was pretty rough for stocks – all major indices ended the week lower driven by a mix of remembering that interest rates are rising, inflation is still high, there’s a war happening in Europe, and earnings expectations being pretty underwhelming because, well, higher interest rates and inflation and war. Big names like Verizon and Netflix reported a decrease in subscribers and many companies slashed their sales growth outlooks.
Moral of the story: Rising food and energy costs are eating at customers’ wallet share, leaving less room for discretionary spending. So, when I look at my credit card statement and realize I’m spending $16/mo on Netflix and don’t particularly use it consistently, yeah, I’m going to pause that membership until there’s something on there I actually want to watch. And companies are getting ready for a policy change from the Fed putting the break on economic growth. We’ll see what next week brings – there are a ton of big tech names reporting earnings next week and we’re expecting a slew of important economic news, but as of now, market sentiment is less than ideal.