The Week Ahead – The Game of Risk

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 Mother’s Day weekend. My parents came for a visit, which was nice. Whenever my mom comes over, my younger son is determined to play a board game. This time he brought out Risk, which has an interesting backstory. Risk was invented by French film director Albert Lamorisse and was originally released in 1957 as La Conquête du Monde (The Conquest of the World) in France. It was bought by Parker Brothers and released in 1959 with some modifications to the rules as Risk: The Game of Global Domination. Playing the game made me reflect on the Russian invasion of Ukraine. While the news is no longer a shock to markets, the effects of the war continue to impact commodity prices, which exacerbates inflation. It does not appear that a resolution is imminent as several pundits have suggested strife may continue for years – let us hope for peace.

Markets have been focusing on the Federal Reserve’s efforts to tamp down on inflation by orchestrating a controlled slowdown in the economy. By increasing interest rates, as they did last week by half a percent, consumers and businesses are less likely to spend or invest. It is a careful balancing act – if they raise rates too aggressively, they risk causing a recession; not raising enough will allow inflation to run amok.

With interest rates shooting higher and the price of oil increasing, we are not sure financial conditions need to tighten much more to slow growth. However, so far, economic data have remained stubbornly strong. Friday’s payroll data confirmed the labor market is very tight. Indeed, there are almost two job openings for every unemployed person in the U.S. While that means the economy will probably not go into a recession, markets are unlikely to get a break from heightened volatility until we start see weaker economic data.

We have started to see some evidence of weaker wage gains. The employment cost index likely peaked in the summer as the Delta Covid wave spread across the country. Schools and daycare facilities were still closed and enhanced unemployment benefits were available to most unemployed people. These factors held down labor participation, creating a temporary but acute labor bottleneck. As inflation and Fed fears moderate, we expect stocks to rebound.

It is inflation week with the Consumer Price Index (CPI), Producer Price Index (PPI) and import price releases scheduled. The headline CPI likely advanced 0.4% in April as gasoline prices fell, but the core metric likely stayed high. The yearly gain for the headline CPI likely slowed a bit to 8.3%. The PPI and import prices are likely to slow too. Unemployment claims are expected to stay low.

Data deck for May 9 - May 13: