The Economic Reports That Shook Wall Street

The Economic Reports That Shook Wall Street

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We received a slew of economic reports this week: The Producer Price Index (PPI), retail sales report for May and the Federal Open Market Committee (FOMC) statement — all of which weighed on the broader market and triggered bouts of volatility.

So, in today’s Market360, I’d like to dig deeper into the economic reports from this past week. Let’s start with the biggest: the FOMC statement.

The FOMC Statement

On Wednesday, the Federal Reserve did exactly what Wall Street wanted: It raised key interest rates by 75 basis points.

This was the largest rate increase since 1994, and the Fed plans to continue lifting rates this year at the quickest pace in decades. The Fed anticipates two more 0.75 percentage point rate hikes. This will put the Federal Funds rate at 3%, right below where the two-year Treasury yield stands.

Initially, investors seemed pleased with the Fed’s decision, as the S&P 500, Dow Jones Industrial Average and NASDAQ Composite ended the day up 1.5%, 1% and 2.5%, respectively. However, Wall Street changed its tune on Thursday after fully digesting the report, prompting a big selloff.

Here’s the reality: The Federal Reserve is not on the same page as other economists regarding the direction of the U.S. economy.

While the central bank did revise its GDP growth forecast to 1.7%, down from 2.8% in March, the Atlanta Fed revised its second-quarter GDP growth estimate to 0%, down from previous estimates for 0.9% annual GDP growth.

Fed Chair Jerome Powell also said the central bank was not trying to induce a recession, but that outside factors affecting the economy, like Russia’s invasion of Ukraine, cannot be controlled.

Unfortunately… a negative second-quarter GDP result is now possible, since the Commerce Department noted that the U.S. economy contracted 1.5% in the first quarter. If this recurs in the second quarter, the U.S. will officially be in a recession. And the Fed’s aggressive rate hike could very well take us there. Thursday’s broader market selloff tells me that Wall Street finally came to this realization, too.

The fact of the matter is fears of a recession are growing following the latest inflation data and May’s retail sales, as well as the brief inversion of the 10-year Treasury yield and two-year Treasury yield curve.

Now, I covered the Consumer Price Index (CPI) report last Friday, but here’s a quick review:

  • CPI rose 1% and accelerated to an 8.6% annual pace in May — the highest level of inflation in over 40 years
  • Core CPI, which excludes food and energy, rose 0.6% in May and is running at a 6% annual pace
  • Food prices rose 1.2% in May and 10.1% in the last 12 months
  • Energy prices surged 3.9% in May and 34.6% in the last 12 months

The bottom line: Consumer inflation did not peak in March, as I’d earlier hoped. And the May PPI data further confirms that.

The Producer Price Index

On Tuesday, the Bureau of Labor Statistics reported a 0.8% rise from April and a 10.8% jump in the past 12 months. This was in line with economists’ projections. The core PPI, which excludes energy and trade, accelerated 8.3% in the past 12 months. For May, core PPI climbed 0.5%, which was slightly below estimates for a 0.6% increase but still above the 0.4% reading in April. Higher food and energy costs were the biggest factors behind the increase.

The wholesale prices of goods rose 1.4%, thanks in large part to energy. The final energy demand index rose 5% and gasoline rose 8.4%. Over the course of the last year, wholesale energy prices have skyrocketed 44.6%. I should also add that the national average for a gallon of gas hit $5 at the retail level, as the AAA reported.

Consumers did see some small wins. Wholesale food prices did not increase month-over-month despite the rising retail prices seen at the grocery store. Wholesale food prices have jumped 13.3% over the past 12 months.

And the wholesale prices for cars and trucks only rose 0.4%, compared to April’s 1% rise, indicating positive forward momentum for the auto industry. The past year has been majorly difficult due in large part to chip shortages.

But the truth of the matter is that while wholesale inflation is below the peak levels in March — 11.5% PPI and 7.1% core PPI — it remains near record highs.

The May Retail Sales Report

Retail sales for May did not fare much better. Wednesday morning it was revealed that for the first time in five months retail sales fell. Retail sales slipped 0.3%, down from a revised 0.7% increase in April.

Spending at gas stations increased 4%, reflecting the higher prices at the pump. The more conservative spending in May shows how inflation is impacting consumers’ purchases of nonessential goods — daily necessities like gasoline are taking priority for consumers’ wallets.

The value of overall retail purchases decreased 0.3%. But excluding sales of vehicles, which saw a 3.5% decrease in sales in May due to price markups, retail sales rose 0.5%. However, this was largely due to gas prices, which climbed 4%. Excluding gas prices, retail sales slipped 0.7%.

Ecommerce sales fell 1%, signaling consumers return to physical stores. Six out of 13 retail categories dipped last month, including electronics and furniture.

Grocery stores saw a 1.2% increase in sales, though this can be attributed to the higher prices at the stores, not to increased consumption.

The retail report does not include services like hotels or plane tickets. Restaurants, the only service component, rose 0.7%.

Where To Look

The latest economic data clearly shows that the inflationary pressure is not slowing down anytime soon and that a recession is growing more likely. And while this has caused Wall Street some panic, that does not mean that now is the time to jump out of the market. In fact, I continue to see great opportunities in the energy sector.

As I mentioned, wholesale energy prices spiked 44.6% in the last year, and the price of gas jumped 4% in the past month. The reality is energy prices are still soaring, as evidenced by the sky-high gas prices. This all bodes well for the energy sector.

So, in the current environment, now is the time to buy fundamentally superior oil companies that are leveraged to the price of oil.

Because oil companies are leveraged, they can see even bigger gains from just a small change in the price of oil. In other words, a 10% move in oil could cause a 100% gain in an oil stock.

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