Most stock indices ended the volatile holiday shortened week lower, with the small cap Russell 2000 posting a modest gain.

Inflation came into focus this week as a perfect storm of events has contributed to increased rates of inflation.  The following events have led to the surge:

• The restarting from the shutdowns of the pandemic continues to strain supply chains, especially with micro-chips and automobiles.
• Having been burnt twice in recent decades with boom and bust cycles and fear of a switch from fossil fuels, energy companies were reluctant to invest more in oil drilling.  OPEC+ also has been cautious in its production increases.
• The war in Ukraine, threatens global supply particularly of the following commodities:
  • Ukraine and Russia account for about 25% of global wheat exports.
  • Ukraine and Russia account for a large portion of world fertilizer exports.
  • Russia is a huge exporter of oil and gas.  The U.S. has banned Russian imports but many European countries are moving slowly while struggling to make up the shortfall from other countries.  The U.S. is increasing liquified natural gas exports to make European countries less dependent on Russia.
• Besides a decline in agricultural exports from Ukraine and Russia, avian bird flu is hitting the U.S. hard with millions of chickens and turkey’s being culled from farms with infections to prevent the spread.
• China’s zero covid policy and strict lockdown in it’s second biggest city of Shanghai threatens more supply chain disruptions.
• The U.S. is facing a labor shortage coming out of the pandemic and also due to demographics as many older people decided to retire.

While this picture may be alarming, many economists are predicting that March may have been the peak of the current inflation.  Time will tell if this is the case.  The U.S. release of oil from the Strategic Petroleum reserve has brought down gasoline prices in April.  However, natural gas prices remain high and likely will for some time.

The European Central Bank announced it would be ending its bond purchasing program in the third quarter and begin raising interest rates gradually after that.  Currently, the ECB’s interest rates are:

• Refinancing Operations, 0.00%.
• Marginal lending facility,  0.25%.
• Deposit facility, -0.50%.

1^st quarter earnings reports started this week with many large financial companies reporting.  Some reported earnings hits due to the war in Ukraine but overall, earnings are still growing but at a more modest pace.

Treasury yields rose with the 30-year bond yield at 2.920% and the 10-Year note at 2.830%.  U.S. crude oil rose to $106.23 a barrel and natural gas rose to $7.323 per MMBTUs.  The U.S. dollar index rose to 100.35 and gold rose to $1975.30 an ounce.

In the economic numbers:

• The Commerce Department reported that retail sales rose 0.5% in February. 
  • This is not adjusted for inflation, so this small of an increase represents a decline in retail sales.
  • Gasoline spending rose 8.9%.
  • Excluding gas stations, sales fell 0.3%.
  • Excluding motor vehicles and gasoline retail sales rose 0.2%.
• The Federal Reserve reported that seasonally adjusted industrial production rose 0.9% in March and rose at an 8.1% annual rate in the first quarter. 
  • Manufacturing output rose 0.9%.
    • Motor vehicles and parts output rose 7.8% in March.
    • Excluding motor vehicles manufacturing output rose only 0.4%
  • Utility output rose 0.4%.
  • Mining, including oil and gas rose 1.7% in March.
• The Labor Department reported:
  • The consumer-price index was rose 1.2% in March and 8.5% from a year earlier.  This was up from 7.9% year over year in February and the highest year over year number since 1981. 
    • The 1.2% monthly gain was the largest since 2005.
    • Half of the 1.2% increase was due to gasoline prices.
    • Core prices, excluding volatile food and energy rose 0.3% in March and 6.5% from a year earlier.
    • Used vehicle prices which had spiked sharply over the previous year saw their largest decline since 1969.
  • The producer-price index rose 0.9% in March and 11.2% from a year earlier.  This was up from 10.3% year over year in February and a record increase.
    • Core producer prices, excluding volatile food and energy also rose 0.9% in March.
  • First time claims for unemployment rose to 185,000, up from a revised 167,000 in the prior week. 
  • The 4-week moving average of claims, designed to smooth out volatility, rose to 172,250.
  • For the full unemployment report go here:  https://www.dol.gov/ui/data.pdf .
• The EIA weekly oil report is here: http://ir.eia.gov/wpsr/wpsrsummary.pdf .  Also, the EIA reported in the prior week:
  • Field production of crude oil was unchanged at 11.8MM BPD.
  • Natural gas storage rose 15BN cubic feet and is below the 5-year average at this time of year.
• Baker Hughes reported the number of active oil rigs rose 2 to 548.  The number of active natural gas rigs rose 2 to 143.
• Factset reported with 7% of S&P 500 companies reporting earnings, the weighted average earnings growth rate was 5.1%.  If this trend holds, this may be the slowest earnings growth rate since Q4 2020.

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Loren C. Rex, CFP^®, MA                                                                     Erik A Smith, AIF®

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 These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.  The Indices mentioned are unmanaged and cannot be invested into directly.