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Will Inflation Data Pressure Stocks This Week?

The S&P 500 lost 0.8% last week. The Fed’s interest rate decision, regional bank failures, and debt ceiling worries impacted stocks. The April jobs report and Apple’s earnings report partly offset the growth worries. Things are on the slower side this week. The updates on inflation in retail and wholesale prices are the main events of a less-busy week.

The Federal Reserve’s interest rate policy-setting committee voted to raise the target range for the federal funds rate by 0.25% to the 5.00–5.25% range, marking the tenth interest rate increase of the tightening cycle that started in March 2022. Fed Chair Jerome Powell signaled a pause in the relentless rise in interest rates could come. He, however, ruled out cutting interest rates, stating that he does not expect inflation to come down to the Fed’s 2% long-term goal quickly.

Concerns about a banking contagion returned. At the outset of the week, the government seized First Republic Bank and facilitated the sale of the failed bank to JPMorgan Chase. Later in the week, another California-based lender, PacWest Bancorp, confirmed it was considering strategic options. Concerns over the health of other regional banks such as Western Alliance, Comerica, and Zions Bancorp pressured their shares.

Treasury Secretary Janet Yellen warned that the U.S. may hit the debt ceiling and run out of measures to pay its debts as early as June 1. On May 9, President Biden is due to meet with the two top Republican congressional leaders, Senate Minority Leader Mitch McConnell and House Speaker Kevin McCarthy, and attempt to resolve the impasse.

Higher-than-expected job creation and Apple’s earnings report helped to ease worries of a recession resulting from the Fed raising interest rates too much. The April employment report showed the U.S. economy added 253,000 jobs; the tally topped the 180,000 job additions forecast by economists in a Dow Jones survey. The report also showed wages rose at a robust 4.5% annual rate, and the unemployment rate dropped to 3.4%.

Apple raised its dividend by 4% and added $90 billion to its stock buyback program after beating analysts’ quarterly sales and EPS forecasts.

For the week ending May 05, the S&P 500 (SPY) fell 0.8%. Three of the 11 sectors advanced. Information technology (XLK) gained the most, while energy (XLE) lost the most.

Sector returns for the week ending May 05, 2023

Leading and lagging sectors for the week ending May 05, 2023.

The S&P 500’s top 10 winners included the following:

1. Consumer Discretionary Sector

  • Royal Caribbean Cruises (RCL) +16% – The week’s top performer in the S&P 500.
  • Carnival Corp. (CCL) +9%

2. Communication Services Sector

  • Live Nation Entertainment (LYV) +14%

3. Information Technology Sector

  • ON Semiconductor (ON) +14%

4. Industrial Sector

  • Generac Holdings (GNRC) +12%

5. Materials Sector

  • Vulcan Materials (VMC) +11%
  • Ball Corp. (BALL) +10%
  • Martin Marietta Materials (MLM) +9%

6. Real Estate Sector

  • Host Hotels & Resorts (HST) +10%

7. Consumer Staples Sector

  • Molson Coors Beverage (TAP) +9%

Top ETFs for the week

The following ETF themes worked well: biotech, gold miners, fintech, innovation, high growth, silver miners. The top ETFs for the week include:

  • SPDR S&P Biotech ETF (XBI) +6.5%
  • VanEck Gold Miners ETF (GDX) +5.4%
  • ARK Fintech Innovation ETF (ARKF) +5.0%
  • ARK Innovation ETF (ARKK) +4.1%
  • Global X Silver Miners ETF (SIL) +3.6%

Will Inflation Data Pressure Stocks This Week?

* Last week, the April jobs report showed that job creation is robust enough to withstand the impact of higher interest rates. The acceleration in wage growth to 0.5% in April from 0.3% in March suggests the Fed could be correct to worry about inflation. Data on inflation at the retail and wholesale levels is due this week. The Bureau of Labor Statistics will release the Consumer Price Index (CPI) and Producer Price Index (PPI) for April on Thursday and Wednesday, respectively. Higher-than-expected inflation can rekindle inflation fears and pressure stocks.

* TradingEconomics.com forecasts the CPI to show a 0.4% increase in April for a year-over-year increase of 5.0%. TradingEconomics expects the core CPI, which excludes volatile food and energy costs, to rise 0.3% for the month and 5.6% year-over-year.

* TradingEconomics forecasts the PPI to rise 0.1%, partially reversing the 0.5% decline in March. TradingEconomics expects the PPI to rise 2.4% year-over-year, less than the 2.7% increase in March.

* Earnings season continues at a slower pace this week. Nearly 30 S&P 500 members are due to report. The reporting companies include Disney, Duke Energy, Electronic Arts, Occidental Petroleum, and PayPal.

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