Welcome to “The Week Ahead” where we take a moment to provide our thoughts on what we can expect in markets and the economy during the upcoming week.

Short-term views versus long-term views. Good news versus bad news. We often get asked the age old question, “when will the next recession begin?” Well, the truest answer is always, “sometime after the last one.” What we do know is that the economy is cyclical, correcting itself both when it has bottomed out and when it overheats (through actions of consumers, investors, governments, and central banks). Today’s market environment is even more opaque than ever. Domestic equity markets have continued to grind higher, returning almost 12% year-to-date. That’s counting last week’s move downward as the S&P 500 index saw its first -2% day since late February after the latest CPI (inflation) reading came in higher than expected. Yes, the CPI reading of +4.2% is a big number (the highest number since September 2008) and well above the Fed’s target of 2%. However, the +4.2% CPI reading is over the period of the last 12 months. Remember April 2020? Probably the most uncertain month through the entire global pandemic which was reflected in both the equity and fixed income markets prices. Probably the most jarring data point from last April was the fact the oil prices went negative for the first time ever. In fact, April 2020’s CPI reading was -0.8%, which was the largest monthly decline going back to 1957.

So what’s driving the inflation number? Autos. I just experienced this first hand after visiting a few dealerships this past weekend. Low inventory for new vehicles (get your deposit in and plan on waiting for a fall delivery!) and if you want to drive off the lot, it’ll most likely be in a used vehicle. Used vehicle prices rose 10% in April and 21% on a year-over-year basis. Airline fares are 9.6% higher than a year ago (so who was flying in April 2020?). The economy and the consumer have gone through a volatile last twelve months; changing the way we work, the way we consume, and what we consume. The supply chain will eventually get back on track over time and normalize. While last week’s volatility was driven primarily on a higher inflation reading, which in turn would force the Fed to raise interest faster than anticipated, Fed Funds rate expectations by market participants didn’t rise. Peeling back the data continues to show that inflation will be transitory, airlines will once again fill the middle seat to maximize their aircraft loads while bringing back more planes to their active fleet. TSA 7-day trailing checkpoint flows are still about 40% below from pre-Covid levels. Investors will be watching for September’s data more closely as the near-term noise gets washed out.

In the week ahead all eyes will be on the latest FOMC minutes to see if any details will reveal when the Fed plans on tapering down their monthly $120 billion of asset purchases, and when they expect to raise rates. It wouldn’t surprise us if inflation readings over the next few months continue to surprise on the upside as supply chains for different sectors move at different paces.

Data deck for May 15–May 21