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Markets inch downward after latest bout of inflationary data, banking concerns

Wall Street pulled back on equities for the second straight week in the face of slowing inflation and growing worries about the banking sector.

MANHATTAN (CN) — Investors are not celebrating the Federal Reserve’s decision to halt interest rate hikes, instead pulling back as growth and the banking sector bear the weight of those increases.

The week saw a stead drip of losses in each of the three U.S. indices, and by the week’s end the Dow Jones Industrial Average had lost 374 points while the S&P 500 lost 12 points. The Nasdaq, despite earlier losses, managed to gain 49 points for the week.

Experts largely attribute the losses to the Federal Reserve’s tightening on growth, as well as lingering banking sector concerns. “The Fed may be done raising rates, but an all-clear signal is far off in the distance,” James Vogt at Tower Bridge Advisors wrote in an investor’s note. “Time will tell if the economy can hold together in the face of a brewing, Fed-created storm.”

Relatively positive inflationary data did little to help Wall Street. On Wednesday, the U.S. Bureau of Labor Statistics found that consumer prices increased by 0.4% last month, following up on the 0.1% increase from March. Since April 2022, consumer prices have gained 4.9%, the first time since mid-2021 that inflation has fallen below the 5% mark and a far cry from the 9.1% annualized inflation seen last summer.

The biggest sectors seeing increases were shelter — which typically follows other sectors when it comes to inflation — at a 0.4% increase, as well as energy gaining 0.6%. Meanwhile, energy services decreased by 1.7%, transportation services fell by 0.2%, and airline prices fell by 2.6% but are still higher than the same point last year.

While inflation continues to drop, it is likely not doing so as fast as the Federal Reserve would like. The central bank has continuously aimed to get average inflation at or below 2% since it began raising interest rates in March 2022, though experts believe the latest numbers solidify the Fed’s decision not to raise rates for some time.

Following the CPI report, the agency’s Producer Price Index showed prices increased by only 0.2%, nearly all of which came from the services sector, showing that Covid-era supply-chain bottlenecks are nearly cleared.

“The PPE numbers solidly confirmed that inflation is in the rear-view mirror,” said Peter Essele, head of portfolio management at Commonwealth Financial Network. “The bond party that began earlier in the year should continue until year-end with the prospect of second-half interest rate cuts from the Fed steadily coming into view.”

Among sectors that saw significant decreases on inflation, transportation and warehousing services declined by 1.7%, its largest since April 2020, while food prices also continued to drop, this time by 0.5%.

There were additional plunges, however, gauged this week in a trio of surveys. The University of Michigan reported Friday that interim consumer confidence has fallen to 57.7 so far for this month, the lowest level since last November. Experts attribute the drop both to the massive downward swing in the current conditions index caused by renewed banking concerns, as well as the debt ceiling standoff in Washington, D.C.

The Fed put out its survey Monday on bank lending among senior loan officers, finding that most banks are reporting “deterioration in the credit quality of their loan portfolios and in customers collateral values, a reduction in risk tolerance, and concerns about bank funding costs, bank liquidity position, and deposit outflows.”

Finally, the National Federation of Independent Business’ reported that its economic trends index fell to 89 points in April, a 10-year low. “Optimism is not improving on Main Street as more owners struggle with finding quality workers for their open positions,” NFIB Chief Economist Bill Dunkelberg said in a statement. “Inflation remains a top concern for small businesses but is showing signs of easing.

April marks the first time in 14 straight months that inflation was not the top concern for small businesses — 24% of respondents listed worker quality as their biggest concern — though it came in a close second with 23% of respondents saying it was their top worry.

“Small businesses account for roughly 45% of the U.S. economy and are showing signs of stress,” said Jeffrey Roach, chief economist at LPL Financial. “Despite a healthy jobs report last week, metrics are pointing toward a broad slowdown in the economy.”

Categories:Economy, Financial, National

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