Global equity markets managed to close this week in positive territory (MSCI World +0.6%), albeit with sharp divergences in regional performance. Major US indices stumbled further, with the headline S&P 500 index briefly falling 20% below its January 3rd record high, capping its seventh consecutive weekly decline, the longest losing streak since 2001. The Dow Jones Industrial Average fell -0.96% for its eight consecutive weekly decline, the longest weekly losing streak since 1932. Remarkable; even our esteemed Executive Chairman wasn’t around to see that one!
In the financial market lexicon, a 20% decline in the price of a security, group of securities, or a broad market index is often used by commentators to denote an ‘official’ bear market. The origin of the expression remains unclear but is often attributed to the way bears attack their opponents by swiping their paws downward. So far this year, riskier pockets of asset markets have been subjected to a metaphorical mauling.
The source of much investor angst remains focused around the war, not of Russia’s continued invasion of Ukraine, but the U.S Federal Reserve’s battle to wrestle back control of America’s inflation issue. Chairman Jerome Powell stepped up the rhetoric last week, saying the Fed would continue hiking interest rates until inflation is ‘tamed’, even if it meant ‘some pain was involved’. The sharp pivot from last year’s ‘transitory’ stance could not be starker.
This comes at a time when forward-looking sentiment indicators are rolling over, epitomised by earnings results from several of the country’s largest retailers. The sector is struggling to adapt to shifting consumer tastes in this less restrictive period of the pandemic. Shoppers are spending more on travel and services instead of big-ticket items such as furniture and kitchen appliances, whilst consumers have also become price sensitive since the withdrawal of government stimulus cheques. Household names like Target and Walmart warned investors that despite positive sales growth, inflation was taking its toll on earnings and margins.
Target executives were also caught flat-footed by unexpectedly high freight and shipping costs, whilst being forced to mark down merchandise to shed excess inventory. The stock plummeted 25% for its worst one-day performance since Black Monday in 1987. Walmart noted on an investor call that company profits were eroded by higher food and fuel costs, increasing wages and a consumer that was selectively trading down to less expensive private label goods. The share price subsequently nosedived the most in a single day in 35 years.
Closer to home, the latest UK macro data provided cold comfort to those looking for signs of inflation respite. The Consumer Price Index (CPI) accelerated to a reading of +9.0% in April, the highest monthly figure since 1982, led by surging electricity and gas prices according to the Office for National Statistics. Chancellor Sunak is under immense pressure to act with tax cuts, state support, or a combination of both, to assist struggling households facing a severe cost-of-living squeeze.
Meanwhile, more stagflation concerns emerged from the Eurozone as the European Commission (EC) slashed its forecast for 2022 economic growth to +2.7% from +4.0%, whilst simultaneously raising its end-of-year inflation forecast to +6.1% from +3.5% previously to reflect higher energy prices. German producer prices rose by a record amount in April, +33.5% higher than a year earlier, driven by soaring natural gas prices.
Elsewhere, relative calm was seen across asset prices operating outside of the fiat currency system, as precious metals (gold and silver) caught a decent bid higher. The cryptocurrency space was mixed, with sentiment still recovering from the tumultuous events of the Terra coin and sister Luna coin collapse during the prior trading week. The c.$30,000 price level remains crucial technical support for Bitcoin.
Looking forward to the week ahead, monetary policy and the inflation picture remain front and centre. With that in mind, the release of two reports is likely to attract a healthy dose of media attention. On Wednesday, the U.S Federal Reserve is scheduled to release minutes from its policy meeting in early May, whilst on Friday the government will update its Personal Consumption Expenditures Price Index, the Fed’s preferred gauge for measuring inflation. Stay tuned.
(Cover Image Source: Zdeněk Macháček)