The Week Ahead – Peak Inflation

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: