Strong 1^st quarter earnings boosted stocks through Wednesday but comments from FED Chair Powell on Thursday cementing the likelihood of at least a half point interest rate hike in May sparked a selloff with major stock indices ending the week significantly lower. 

The dollar continues to strengthen against foreign currencies with expected interest rate increases.  This week the dollar hit a 20-year high against the Japanese Yen.  A stronger dollar can help reduce inflation by lowering the cost of imports.

Inflation remains a concern.  Putting it in perspective, for the 9 years from 1973-1981, inflation(using the “Consumer Price Index”) averaged +9.2% per year.   For the 9 years from 2012 to 2020, inflation averaged +1.6% per year(source: Bureau of Labor Statistics).  We are coming off a long period of very low inflation but we experienced a long period of elevated inflation in the 1970s through the early 1980s.  The question is, how long will this inflation last?  While the prediction that inflation was going to be transitory left many thinking it was a short period, it appears to be taking longer.  With appropriate central bank action it likely will be much shorter than nine years.  Supply chains are taking longer than expected to recover as chip shortages, labor shortages, housing shortages, Covid shutdowns (now mostly in China) and recent developments in the food supply have continued to hamper supply chain recovery.  While some drivers of inflation may end up being transitory, the shortage of labor, may last much longer.  In the 1973-1981 period inflation was demand driven by baby boomers coming of age and making large purchases.  Labor will continue to be constrained by those same baby boomers retiring at a faster rate than young people entering the workforce.  Also, more young people are delaying reaching their years of peak productivity.  These issues will not be fixed solely by the FED raising interest rates, although rate hikes will slow the demand side of the equation.  When Jerome Powell spoke during a panel discussion in addition to agreeing with the likelihood of a half percent rise, he said that it was appropriate to move more quickly in hiking rates and said “there is something in the idea of front ending loading rate hikes.”  This may bode for us seeing several half point or more hikes this year.

Treasury yields rose with the 30-year bond yield at 2.951% and the 10-Year note at 2.898%.  U.S. crude oil fell to $101.15 a barrel and natural gas fell to $6.426 per MMBTUs.  The U.S. dollar index rose to 101.15 and gold rose to $1934.70 an ounce.

In the economic numbers:

• China reported it grew at a 4.8% annual rate in the first quarter.  It is expected this will slow significantly in the second quarter with the strict Covid shutdown in Shanghai.
• The World Bank lowered its forecast for 2022 world growth from 4.1% to 3.2% due to the war in Ukraine.  World growth was 5.7% in 2021.
• The Commerce Department reported that housing starts rose 0.3% in March defying economists predictions of a slowdown.
  • Multi-family starts grew while single family starts fell, likely due to higher mortgage rates.

• • Permits, an indication of future housing starts, rose 0.4% in March.
• The National Association of Realtors reported existing home sales fell 2.7% in March, from February and were down 4.5% from March 2021 as tight inventories limited sales.
  • The median existing home price sold was $375,300, up 15% from a year earlier.
  • 30 year mortgages hit 5% this week up from 3.04% a year ago.
• Canada’s consumer price index rose 6.7% year over year in March, up from 5.7% year over year in February.
• The Labor Department reported:
  • First time claims for unemployment fell to 184,000, up from a revised 185,000 in the prior week. 
  • The 4-week moving average of claims, designed to smooth out volatility, rose to 177,250.
  • 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 rose from 11.8MM BPD to 11.9MM BPD.
  • Natural gas storage rose 53BN cubic feet and is below the 5-year average at this time of year.
• Baker Hughes reported the number of active oil rigs rose 1 to 549.  The number of active natural gas rigs rose 1 to 144.
• Factset reported with 20% of S&P 500 companies reporting earnings, the weighted average earnings growth rate was 6.6%. 

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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.