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The Week Ahead – Peak Inflation

| 5/31/22 11:32 AM

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.

Hope everyone had a nice long Memorial Day weekend. A sincere thank you to all the veterans and their families for your service and sacrifice.

In addition to spending time with my family and friends over the weekend, I was determined to buy a new television for our media room. The one I have is fine, but it’s getting a bit dated by today’s standards - so time to upgrade. I thought there would probably be some good deals for Memorial Day weekend, so I held off. Sure enough, the exact TV I was hoping to buy was on sale, so I did my part to keep the economy growing and snatched it up at an excellent price.

Speaking of the economy, markets rallied hard last week as economic data is signaling a clear slowdown - particularly in housing. Remember, the Federal Reserve (Fed) is raising interest rates in a deliberate and coordinated attempt to cool consumer demand. They need to slow economic growth and loosen the labor market just enough to moderate inflation, but not so much as to cause a recession. To be clear, we still do not expect a recession in 2022. In no-recession scenarios, stock market returns have been positive 12 months after inflation peaks, with a median return of 9.6%.

While inflation is not going away anytime soon, we are seeing a lot of empirical as well as anecdotal evidence that inflation has peaked. One of the reasons both Target and Walmart reported such poor earnings a couple of weeks ago was due to an inventory glut. It seems that the insatiable appetite for goods may have finally been sated. Expect to see prices on many consumer goods fall (such as TVs) now that inventories have been rebuilt. If inflation is reduced without causing a recession, stock market returns should be positive. Equity markets could be particularly robust if the financial condition tightening needed to slow growth is more benign than expected.

There are key domestic economic releases almost every day this week. The regional Purchasing Managers Index (PMI) and Fed surveys generally fell and suggest the manufacturing ISM likely dropped below expectations. Motor vehicle sales probably accelerated to 14.5 million. The key release of the week is payroll employment: expect a 300k gain for May. Layoffs are increasing, particularly in the technology sector; net job growth should slow further. The unemployment rate dropped to a cycle low of 3.50%.

Data deck for May 30 - June 3:

Date

Indicator

Period

May 30

None scheduled -- Memorial Day holiday

 

May 31

S&P Case-Shiller national home price index

Mar

May 31

FHFA national home price index

Mar

May 31

Chicago PMI

May

May 31

Consumer confidence index

May

Jun 1

S&P Global U.S. manufacturing PMI (final)

May

Jun 1

ISM manufacturing index

May

Jun 1

Job openings

Apr

Jun 1

Quits

Apr

Jun 1

Construction spending

Apr

Jun 1

Beige book

Apr

Jun 2

Motor vehicle sales (SAAR)

May

Jun 2

ADP employment report

May

Jun 2

Initial jobless claims

May 28

Jun 2

Continuing jobless claims

May 21

Jun 2

Productivity revision (SAAR)

Q1

Jun 2

Unit labor costs revision (SAAR)

Q1

Jun 2

Factory orders

Apr

Jun 3

Nonfarm payrolls

May

Jun 3

Unemployment rate

May

Jun 3

Average hourly earnings

May

Jun 3

Labor-force participation, ages 25-54

May

Jun 3

S&P Global U.S. services PMI (final)

May

Jun 3

ISM services index

May

IMPORTANT DISCLOSURE INFORMATION    

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by First Foundation Advisors), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from First Foundation Advisors. Please remember that if you are a First Foundation client, it remains your responsibility to advise First Foundation, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. First Foundation Advisors is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the First Foundation Advisors’ current written disclosure statement discussing our advisory services and fees is available for review upon request, or at firstfoundationinc.com.  Please Note: First Foundation Advisors does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to First Foundation Advisors’ web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Brett Dulyea, CFA, CAIA
About the Author
Brett Dulyea, CFA, CAIA
Mr. Dulyea serves as a Portfolio Strategist on the investment team and is responsible for conducting manager research and executing investment strategies for clients. As a member of the investment committee, he provides market commentary and investment insights. Mr. Dulyea’s specializes in advising client portfolios, defining investment plans, and communicating the firm’s investment viewpoints. Prior to joining the firm, Mr. Dulyea was a Director, Portfolio Manager at Deutsche Bank. In addition to working directly with clients, he was a member of the Fixed Income Strategy Group and managed customized portfolios for clients. He previously worked in the Wells Fargo Wealth Management Group as a Vice President, Senior Investment Strategist and at Merrill Lynch as a Vice President, Portfolio Manager. Mr. Dulyea earned his Master’s in Business Administration (MBA) from California Polytechnic University, Pomona and holds the Chartered Financial Analyst® (CFA) designation and the Chartered Alternative Investment Analyst (CAIA) charter. He earned his Bachelor’s degree from the California Polytechnic University, Pomona. He also served as an adjunct Professor of Finance at California Polytechnic University, Pomona for two years. Read more