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Markets Eke Out Winning Week in Swirl of Data, Good and Bad

With inflation concerns and labor shortages on the one hand, and dropping unemployment and rising GDP on the other, investors slow-walked their way to a winning week on Wall Street.

MANHATTAN (CN) — As summer approaches, temperatures appear to be heating up in lockstep with inflation, causing investors to cool their heels somewhat despite some promising data.

A week of paltry gains and minuscule losses for the Dow Jones Industrial Average ended Friday on a positive note, with the index closing 323 points higher than it had last week. The S&P 500 and Nasdaq had similar runs: The former pulled ahead about 150 points by the closing bell, while the latter managed to snag a 278-point gain for the week.

Even though it was not a terribly busy week for economic data, investors still had a number of key — and potentially conflicting — reports about the path of the U.S. to influence their trading.

On Thursday, the Bureau of Economic Analysis reported that gross domestic product increased at 6.4% during the first quarter of 2021, the same rate as was reported last month in the advance estimate. Consumer spending, business and housing investment, and government funding helped spur the increase.

Real disposable personal income gained a whopping 61.7% last quarter, while personal saving as a percent of disposable income rose to 21.4%. Corporate profits fell 0.1% after a 1.4% decrease in the fourth quarter of last year. Corporate profits are still up 12.7%, however, compared with a year ago.

Meanwhile, more indications that inflation is rising came on Friday, as the Bureau of Economic Analysis reported a 0.6% increase last month in the PCE price index, short for personal consumption expenditure. Cutting out food and energy, which can fluctuate in price, the core PCE index rose 0.7% in April, the highest monthly gain since Sept. 11, 2001, terrorist attacks. Compared with a year ago, headline PCE has risen 3.6% and core PCE has gained 3.1%.

Peter Boockvar, chief investment advisor at Bleakley Advisory Group, said in an investor’s note that the data did not and should not have surprised Wall Street. “Inflation is here and it is widespread,” he wrote. “It is not a debate. The only debate is how long it lasts.”

Experts differ on that question. Tom Essaye of the Sevens Report suggests the market won’t know about long-term inflation until data from June and July start to roll in. “Put differently, we all know that inflation surged in April,” he wrote on Thursday. “The key is whether it keeps going through the summer.”

If inflation continues during the summer months, Essaye wrote, that could cause volatility and push yields higher, but if it doesn’t that could mean a mild outperformance by tech stocks.

The Federal Reserve remain sanguine on inflation, with Vice President Randal Quarles telling the Brookings Institution earlier this week that he considered “recent increases in inflation expectations a welcome development, reversing the large declines seen last spring and perhaps edging up” in response to the Fed’s new policy framework. 

Last August, the central bank shifted its approach to inflation to seek 2% over a longer term, based primarily on the annual change in the PCE price index. While the latest headline PCE numbers show a year-over-year increase of 3.6%, the Fed clearly thinks inflation will die down.

Meanwhile, other data show prices continuing to rise. Home prices have been skyrocketing, gaining anywhere from 13% to nearly 14% this past March as compared with March 2020 — the highest gain since late 2005. Several cities saw gargantuan price increases: Phoenix led the pack with a 20% year-over-year price increase, with San Diego and Seattle nipping at its heels with 19.1% and 18.3%, respectively, according to the CoreLogic Case-Shiller index.

Some experts predict the second half of 2021 will mark the slowdown of the party as prices remain high even as sales slow. “We expect any gains inventory to make only a small dent in what has been a chronic, years-long shortage of supply, particularly at lower price points,” said Nancy Vanden Houten, lead economist at Oxford Economics.

The gains in inflation may be taking their toll on consumers, as the University of Michigan reported a drop Friday in its consumer sentiment index from 88.3 in April to 82.9 this month. “While the growth of an inflationary psychology is unlikely, it cannot be entirely dismissed,” survey chief economist Richard Curtin said in a statement. “Indeed, two-thirds of consumers already expect higher interest rates. Higher inflation and higher unemployment each have uneven impacts across the population.”

Unemployment once again dropped, too, which spurred some optimism on Wall Street. For the week ending May 22, 406,000 initial claims were filed, compared with 444,000 claims the prior week. The number of Americans filing for unemployment benefits still is almost twice as much as before the pandemic struck in mid-March 2020, but it has steadily dropped the last few weeks.

More than two dozen states, Florida the most recent, have decided to end their federal emergency unemployment programs months early starting in June, citing labor shortages and nearly reopened economies. Nearly all those states have Republican governors.

A report by Capital Economics suggests that labor problems are a real thing and becoming a significant drag on the economy. But now, with nearly half of all states opting out of federal programs — several of them before the disappointing jobs report that caught analysts and Wall Street by surprise earlier this month — the problem could be due more to a “fundamental skills mismatch” brought on by older workers retiring early.

"We estimate that jobs growth strengthened slightly in May but remained disappointing, with non-farm payrolls rising by 500,000,” wrote Andrew Hunter, senior U.S. economist for Capital Economics, noting that fears over the virus and difficulties returning to work due to school closures are easing.

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