After 7 weeks of declines, stocks rebounded sharply this week on a mix of strong retail earnings, weaker economic numbers and lower inflation in April.  The irony with weaker economic numbers is that it raises hopes that the FED’s fight against inflation may be shorter, with fewer rate hikes than previously expected, making stocks more valuable.  Whether that proves to be correct will take time.  While weakening demand can help reduce inflation, the issues with the supply side, may take longer.  Worldwide shortages of oil, natural gas, wheat, corn and sunflower oil will largely depend on peace in Ukraine.  Microchip shortages depend on new factories coming online which could take well into 2023.  Goods production in general, depends on an end to the resurgence of Covid in China and it’s Covid Zero shutdowns.  Across the world, on every continent, countries are banning some food exports as the war in Ukraine is creating shortages by preventing the export of grains and sunflower oil. 

This week’s gains could be a March 9, 2009 moment or it could be another buy on the dip reaction.  As markets typically move in advance of clear changes in the economy, it will take time to tell if this has legs.

Christine Lagarde, the European Central Bank president said that the ECB could increase its key interest rate from negative to zero by September ending an eight year experiment with negative rates.  Meanwhile the FED is on track to hike short term rates another half percentage point in June and start reducing its balance sheet by $95BN a month.

The Biden administration announced the Indo-Pacific Economic Framework for Prosperity.  The initiative includes 13 Indo-Pacific countries and the U.S. consisting of about 41% of the world’s gross domestic product and is designed to lower trade barriers and counter China’s influence in the region.  Biden stated this week that the U.S. would intervene militarily if China invades Taiwan possibly ending decades of strategic ambiguity.

Treasury yields were mixed with the 30-year bond yield at 2.970% and the 10-Year note at 2.745%.  Mortgage rates fell with the 30-year mortgage rate ending at 5.35%.  U.S. crude oil rose to $115.18 a barrel and natural gas rose to $8.707 per MMBTUs.  The U.S. dollar index fell to 101.67.  Gold rose to $1851.00 an ounce.

In the economic numbers:

• The Commerce Department reported
  • New home sales plunged 16.6% in the month of April to the lowest rate since April 2020 on increased construction costs, supply chain disruptions and higher mortgage rates.
  • The 1^st quarter gross domestic product was revised from -1.4% to -1.5%.
  • Durable goods orders rose 0.4% in April, mainly due to an increase in aircraft orders, and March was revised to 0.6%.  Durable goods orders are not adjusted for inflation.
    • Non-defense aircraft and parts orders rose 4.3% following an 8.1% decline in March.
    • Non-defense capital goods excluding aircraft rose 0.3%.
  • The personal consumption price index in April was 6.3% above a year ago, down from 6.6% in March.  This is the FED’s preferred measure of inflation.
    • Excluding food and energy PCE prices rose 4.9% from a year earlier.
    • For the month of April the PCE price index rose only 0.2% and 0.3% excluding food and energy.
  • Consumer spending in April rose 0.9% or 0.7% after inflation.
  • Personal incomes rose 0.3% or less than 0.1% after inflation.
  • The savings rate fell from a downwardly revised 5.0% last month to 4.4% this month.

• The Labor Department reported:
  • Seasonally adjusted first time claims for unemployment fell to 210,000, down from 218,000 in the prior week. 
  • The 4-week moving average of claims, designed to smooth out volatility, rose to 206,750.
  • 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 11.9MM BPD.
  • Natural gas storage rose 80BN cubic feet and is below the 5-year average at this time of year.
• Baker Hughes reported the number of active oil rigs fell 2 to 574.  The number of active natural gas rigs rose 1 to 151.

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

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Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC.  Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor.  Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.

 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.