Following a very strong week in the markets, the Dow (-0.8%), NASDAQ (-1.0%), and S&P 500 (-1.2%) slipped moderately last week. Taxable bonds also lagged by almost 1%, as the 10-year Treasury jumped back to almost 3% following some easing the past couple weeks. On the contrary, tax-free municipal bonds continued their three-week rally from their abyss, as they gained about 0.2% - 0.4%.
All eyes continue to be on inflation, but more so on the Fed’s response and its intent to raise interest rates in the coming months. While being masked by the inflation and gasoline prices reaching $5 per gallon, economic data has remained healthy. The jobs report last week was strong, the ISM index of new orders increased in May, wage growth is slowing, and the unemployment rate remains historically low at 3.6%. These data support the oddity of “good news is bad news”, if that could possibly make sense. In short, when the US shows strong economic data (particularly with jobs), then that gives the Fed more latitude to raise interest rates, and that is what is spooking the markets.
Later this week, the US reports key inflation data for May. While it is widely anticipated that the Fed will raise interest rates by another 0.5% in June, this inflation data will be extremely important to show inflation trends and what the Fed may do in future months. For now, the Fed is expected to raise interest rates by 0.5% each in June and July, but the real question remains what they will do at their September meeting. If we see inflation slowing down, this will bode well for both the stock and bond markets. Expect a wild ride on Thursday. Let’s hope that ride is up, rather than the alternative.
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About the Author: Michael Menninger, CFP®️