Last Week on Wall Street

Last Week on Wall Street - May 11th, 2024

S&P 500: 1.85% DOW: 2.16% NASDAQ: 1.14% 10-YR Yield: 4.50%

What Happened?

The Dow Jones Industrial Average continued its winning streak on Friday, marking its eighth consecutive session of gains and wrapping up its best week of 2024. The index added 125 points, or 0.32%, to close at 39,512, while the S&P 500 climbed 0.16% to 5,222, and the Nasdaq Composite inched lower by 0.03% to 16,340. This positive momentum was reflected across the major averages, with the Dow posting a 2.16% gain for the week, its best performance since December, while the S&P 500 and Nasdaq Composite recorded their third consecutive winning weeks, rising 1.85% and 1.14%, respectively. However, investor enthusiasm was tempered by consumer sentiment data released Friday morning, which showed a significant uptick in inflation expectations. The preliminary May reading for the University of Michigan’s consumer sentiment index came in well below expectations, indicating potential concerns about the direction of inflation.

The Federal Reserve's stance on interest rates remains in focus, with market participants closely monitoring economic data for clues on the central bank's future actions. The weaker-than-expected jobs report for April and easing wage growth have fueled speculation that the Fed could consider lowering interest rates sooner rather than later. This sentiment was underscored by a sharp decline in Treasury yields, with the 10-year Treasury note dropping to nearly 4.45%, its lowest level in over three weeks. However, concerns about inflation persist, and Fed officials are adopting a cautious approach as they evaluate the data. Despite the positive market performance, traders are bracing for volatility ahead of next week's release of April's consumer price index reading, which could provide further insights into inflationary pressures and potential implications for monetary policy.


Consumer Sentiment Tumbles as Inflation Fears Surge

  • The University of Michigan Survey of Consumers sentiment index for May posted an initial reading of 67.4 for the month, down from 77.2 in April and well off the Dow Jones consensus call for 76. The move represented a one-month decline of 12.7%.
  • The one-year inflation outlook jumped to 3.5%, up 0.3 percentage point from a month ago to the highest level since November 2023.

The key takeaway - Consumer sentiment took a hit in May as inflation expectations surged, despite positive economic indicators, according to the University of Michigan Survey of Consumers released Friday. The sentiment index dropped to 67.4 from April's 77.2, well below expectations. Inflation expectations for both one- and five-year horizons increased, reaching their highest levels since November. This decline in sentiment was reflected in other indexes within the survey, with current conditions and expectations measures both experiencing substantial drops, raising concerns about the direction of inflation, unemployment, and interest rates in the year ahead.

The report poses challenges for policymakers as the Federal Reserve considers its next steps on monetary policy. Rising uncertainty about the inflation path could dampen consumer spending in the coming months, complicating the Fed's balancing act between price stability and economic growth. While market expectations point to a potential rate cut in September, Fed officials have emphasized the need for greater confidence in sustainable inflation before adjusting interest rates. The upcoming release of April's consumer price index report will provide further insights into inflation trends, with Wall Street economists expecting a slight moderation in price pressures despite the CPI index running above the Fed's target.


Jeff Cox - CNBC & Bloomberg

Weekly Jobs Claims Hit Highest Level Since August 2023

  • Initial filings for unemployment benefits reached their highest level since late August 2023, indicating a potential shift in the robust labor market.
  • Jobless claims totaled 231,000 for the week ending on May 4, marking the highest number of claims since August 26, 2023, and suggesting a notable increase in new layoffs.

The key takeaway - Initial filings for unemployment benefits have surged to their highest level since late August 2023, indicating a potential shift in the otherwise robust labor market. The Labor Department reported that jobless claims totaled 231,000 for the week ending on May 4, up 22,000 from the previous period and surpassing the Dow Jones estimate. This marks the highest number of claims since August 26, 2023, suggesting a notable increase in new layoffs. The rise in claims comes amid mostly strong hiring reports, although April's job growth fell short of expectations, and job openings have been declining, signaling a potential slowdown in the labor market throughout the year.

Continuing claims, which lag by a week, also increased to 1.78 million, while the four-week moving average of claims rose to 215,000. Economists caution that while one week does not establish a trend, the magnitude of the increase in weekly jobless claims raises concerns about the future of the U.S. economy. Despite the unemployment rate remaining below 4% since February 2022, the unexpected spike in claims suggests potential volatility ahead as the labor market adjusts. Federal Reserve officials are closely monitoring these developments as they aim to address inflation concerns and consider the timing of interest rate adjustments, with markets anticipating a possible rate cut as early as September.


Tax Revenue Jumps 22% in April, but US Deficit Still Looms Large

  • April tax receipts totaled $776 billion, marking a 22% increase from the previous year.
  • Government spending for the month rose by 23% compared to a year ago, with higher interest payments on the federal debt contributing significantly to the increase.

The key takeaway - In April, the U.S. Treasury experienced a surplus thanks to tax receipts totaling $776 billion, marking a significant 22% increase from the previous year. However, despite this surplus, the federal government remains on course to end the fiscal year with a deficit exceeding $1.5 trillion. The surge in tax revenues was attributed to a growing workforce and rising wages, reflecting the overall strength of the economy.

Government spending also saw a substantial increase of 23% compared to the previous year, driven primarily by higher interest payments on the federal debt, which rose by $26 billion. Despite efforts to control spending, federal expenditures have outpaced tax receipts by $855 billion over the past seven months, resulting in a deficit that, although smaller than the previous year, remains notably high for a country with low unemployment and a strong economy. White House economic adviser Lael Brainard attributed much of the deficit to the 2017 tax cuts, emphasizing the need for fiscal reforms as large parts of these cuts are set to expire next year.


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