MANHATTAN (CN) — Markets fell significantly on Friday, intensifying less drastic losses earlier in the week, as investors prepare for longer-term inflation.
The indices have been gradually shedding points all week, most notably on Wednesday after the Federal Reserve’s Federal Open Market Committee increased its inflation projections for the year to 3.4% from 2.4% in March and predicted two interest rate hikes in 2023 to 0.6%. The Fed forecasts median inflation will fall to 2.1% in 2022 and then rise slightly to 2.2% in 2023.
However, by Friday the losses sped up: the Dow Jones Industrial Average dropped 432 points, a 1,188-point loss since last Friday, while the S&P 500 had a similar outing on Friday but dropped just 81 points for the week. The Nasdaq did a bit better than the two other indices, but still lost on Friday, declining 39 points for the week.
The Fed has been adamant about keeping inflation above 2% on average “for some period,” though it’s anybody’s guess whether that means for another year or even years before the central bank decides to rein in inflation by raising interest rates.
In comments to the press after Wednesday’s FOMC statement, Federal Reserve Board Chair Jerome Powell noted the central bank was shifting its approach.
“You can think of this meeting that we had as the ‘talking about talking about’ meeting, if you like,” Powell said, referencing his oft-quoted statement that the Fed was not even “thinking about thinking about” raising interest rates.
Still, Powell added shortly thereafter that “the economy has clearly made progress, although we are still a ways from our goal of substantial further progress.” He also reiterated the Fed’s position that tapering would depend on the pace of the economic recovery and not on any calendar date. “It’s outcome-based,” Powell told a reporter. “It’s not time-based.”
Following Powell’s comments, however, St. Louis Fed President James Bullard said on Friday that he was inclined towards raising rates late next year.
“This is very much a debate about what’s going to happen in 2022,” Bullard told CNBC, noting some members of the Fed believe inflation will remain under 2% next year and that the forecast could change. “These are things far in the future in an environment where we’ve got a lot of volatility, so it’s not at all clear that any of this will pan out the way anybody’s talking about it.”
Other members of the Federal Open Market Committee are not as worried about inflation. The Federal Reserve Bank of San Francisco stated on its blog that it believes “the recent sharp increase in measured inflation is unlikely to persist beyond this year” and noted the price spike for low-risk products such as furniture and appliances are likely to drop as the economy returns to pre-pandemic conditions.
Experts predict the Fed will be more forthcoming about its plans after its annual meeting in Jackson Hole, Wyoming, later this summer.
Some experts remain as confident as ever in the Fed.
“With the stated goal of ‘average’ inflation over 2%, there is plenty of room to run before it becomes an issue,” wrote James Vogt of Tower Bridge Advisors on Friday, noting that the overall inflation rose only 2.3% last month if oil, airfare, and car prices were taken out of the equation. “If the month of May, which is the peak in inflation and had a slew of reopenings, pent-up travel demand, stimulus spending, and a flush consumer, can only produce fractionally higher inflation, what will happen next year when all of this is behind us?”
But inflation, which can be based on perception as much as anything else, remains a concern for many. On Monday, the Federal Reserve Bank of New York’s Survey of Consumer Expectations found median inflation expectations for one year ahead increased by 0.6% last month. This is the seventh consecutive monthly increase and a new high in the series, which has been run since 2013. For the next three years, median inflation expectations also increased from 3.1% to 3.6%, the highest since August 2013.
Home price inflation expectations also gained 0.7% to hit 6.2%, the third consecutive month marking a new series high. The National Home Builders Association states that home prices are likely to remain high for some time, as low supply does not seem to be abating.
However, unemployment concerns are dropping, according to the New York Fed, hitting a new series low last month, while the average “perceived probability of finding a job” rose from 49.8% in April to 54% last month, the largest month-to-month increase in the series.
Unemployment claims have been slowly dropping but on Thursday they picked back up for the first time in seven weeks. For the week ending June 12, the Labor Department recorded 412,000 initial unemployment claims, an increase of 37,000 over the prior week’s numbers. While several states have begun to phase out extended unemployment benefits, an uptick in a few states — most notably California, Kentucky, and Pennsylvania — pushed the overall number higher.
Other surveys show optimism among key groups. A survey of 750 small business owners by the U.S. Chamber of Commerce found that 27% rated the U.S. economy as good, up from 21% who rated it good during the first quarter of 2021. Less than half of those surveyed rated the national economy as poor, the first time fewer than 50% have rated it so since the pandemic began in early 2020.
“Small businesses are seeing real reasons for optimism this quarter, and we’re seeing that reflected in the data,” U.S. Chamber Vice President Tom Sullivan said in a statement, noting the easing of capacity restrictions is driving that sentiment. “Increased foot traffic equates to economic growth, and that is moving our country’s recovery forward.”
More than half the small businesses surveyed think their revenue will increase this year, a 10% jump compared with the first quarter of 2021, while about one-third plan to increase staffing this year.
Businesses have good reason to be feeling good, as retail sales are still high. Even though retail sales showed a 1.3% decrease last month, experts say that marks a change in consumer behavior out of large purchases and into the pent-up services sector.
“Despite the slowdown, the consumer pulse remains vibrant with headline and core retail sales still 18% above their pre-pandemic level after large upward revisions to April sales,” wrote Lydia Boussour, an economist at Oxford Economics. She predicts a 9% increase in consumer spending advance this year, which would be the strongest performance since 1946.
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Markets keep losing as inflation continues to take its toll April 19, 2024 -
