This suggests to investors that the Fed could keep raising interest rates aggressively through the end of the year as it tries to control inflation.
“Upcoming inflation data will be more important in determining the pace of gains after July,” Citi economists said in a note to clients earlier this week.
The big question for Wall Street policymakers is whether inflation has peaked. When excluding volatile food and fuel costs, annual inflation in May rose 6%, slightly lower than it was in April.
“I’m confident that inflation will come down significantly by this time next year and back to something we feel comfortable in shortly thereafter,” Mark Zandi, chief economist at Moody’s Analytics, wrote in a column for CNN Business.
Noting the fading impact of the epidemic, he said that after the European Union announced its oil embargo on Russia, “the worst economic repercussions of Russian aggression are within reach.”
But what happens in the meantime remains a mystery. Higher fuel and food prices lead to inflation in other parts of the economy. Goldman Sachs said this week that US gas prices are only hovering at less than $5 a gallon, and oil prices may rise this summer.
One factor I’ve been watching closely is the cost of housing, also known as “housing inflation.”
The Shelter Index is up 5.5% from a year ago, according to May data. This was the largest increase since February 1991.
This is already noticeable. But Citi economists caution that the data could be slow to reflect the environment for renters, meaning there is a chance housing costs will rise more than expected in the coming months.
Buyers also continue to feel the effects of record-high home prices, even though rising mortgage costs are encouraging some Americans to delay purchases.
“Overall, while housing demand has recently shown signs of slowing, home prices continue to rise at a robust pace and suggest that it will take some time (until next year) before home prices start to slow further,” Citi’s team said.
The Chinese economy is looking brighter. It is not clear yet
From big gains in technology stocks to strong trade data, China received a lot of good economic news this week.
The positive developments come after the world’s second-largest economy has been battered by widespread COVID-19 lockdowns, blanket suppression of technology companies, and a real estate slump. Consumer spending and factory production both contracted sharply in April, while the unemployment rate jumped to the highest level since the initial coronavirus outbreak in early 2020.
Remember: Earlier this week, the Wall Street Journal reported that a cybersecurity review in Beijing on Didi was nearing completion. The move would allow the carrier giant to return to app stores in China, nearly a year after it removed Didi over data privacy violations. Chinese technology stocks jumped.
There were other signs that Beijing’s efforts to rein in tech companies could be backing down as well. Bloomberg said Chinese regulators had started discussions at an early stage about a possible revival of Ant Group’s public offering, citing people familiar with the matter.
China also released strong trade data for May, after a dip in April. The country’s exports jumped about 17% in May from a year ago, compared to growth of just 3.9% in April. Imports rose for the first time in three months.
However, analysts say much more needs to be done to repair investor confidence in China, and some of the big risks haven’t gone away.
“It will take time to repair business confidence, and the sell-off in Chinese assets may resume if China’s data proves disappointing again,” said Ken Cheung, chief Asian foreign exchange analyst at Mizuho Bank.
Americans lost half a trillion dollars in wealth in early 2022
Sometimes, fluctuations in stock prices can seem abstract. But this year’s market turmoil has had real consequences, wiping out billions of dollars from Americans’ wealth.
This is a marked turnaround from the strong gains in wealth that began in the middle of 2020, driven by the massive rise in home and stock prices.
Quick return: The Dow and S&P 500 are down about 5% in the first three months of the year, while the Nasdaq is down about 9%. It was the worst quarterly performance of markets since the first quarter of 2020, when the Covid-19 pandemic upended the US economy.
The decline in stocks was partially offset by a $1.7 trillion increase in real estate values and a continued high personal savings rate. The ratio of household net wealth to disposable income has remained near record highs and remains well above its pre-pandemic level in 2019.
But the data says why so many Americans feel bad about the health of the economy.
Although spending remains strong, and most economists do not expect a recession this year, heavy market selling has soured the mood as the value of trading portfolios and retirement accounts dwindles. About 58% of Americans own stock, according to Gallup.
The latest reading of the US CPI arrives at 8:30 AM ET.
Also today: The University of Michigan early reading of data on consumer confidence for the June publications at 10 AM ET.
Next week comes: ECB optimism rattled markets on Thursday. Now attention will turn to the Federal Reserve, which announced its latest policy decision on Wednesday.
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