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Despite a strong rally on Friday, equity markets remained under pressure last week with the S&P 500 posting its sixth consecutive week of losses amid heightening inflation concerns. For the week, the S&P 500 tumbled 2.4%, while the Dow Jones and the tech-heavy Nasdaq lost 2.1% and 2.8%, respectively. While inflation readings continued to surprise to the upside last week, interest rates have actually trended lower from peak levels reached earlier this month as investor concerns mount that the Federal Reserve will need to step harder on the policy brakes to bring inflation down. The 10-year U.S. Treasury yield has fallen to around 2.9% after pushing as high as 3.2% a few weeks ago. Stabilizing interest rates would be welcome news to fixed income investors that have been hit hard by rising rates, but they do indicate growing cracks in the economic outlook.

From a headline perspective, April’s inflation readings started to show a deceleration in the year-over-year pace of price growth as CPI grew 8.3% over the prior year compared to 8.5% in March. However, the improvement fell short of expectations (the consensus forecast was 8.1%) and the decrease in the inflation rate was driven primarily by a base effect from lapping high price comparisons from a year ago rather than reflecting a notable improvement in inflation pressures. The report did show moderation in some core good prices, like used cars and apparel, but prices in core services, including rent and transportation, have started to accelerate and offset improvement in goods prices. Food and energy prices remain areas of concern from the disruption of the war in Ukraine and have fed into price increases for other goods and services, such as airfare, where prices rose 18.6% in April alone.

In other words, this was not the inflation report that the Federal Reserve was hoping for. Moderating inflation in the back-half of the year, beyond base effects, will be dependent on improvement in supply-side issues, or else the Federal Reserve will need to react to bring down demand through sharper tightening of policy than has already been communicated. To date, global supply chains remain challenged by the ripple effects of the war in Ukraine and China’s strict zero-Covid policy. Some nations have responded to supply shortages with export limitations and bans on key materials. This weekend, India announced a ban on all wheat exports except to countries that require wheat for food security needs. The ban further fuels global wheat prices, with Chicago wheat futures now up about 60% so far this year.

On a brighter note, Covid trends in China have shown strong signs of improvement after Shanghai achieved a key reopening milestone of three consecutive days with no new Covid cases outside quarantine zones. As a result, Shanghai will gradually begin reopening businesses such as shopping malls, department stores and supermarkets starting on Monday, while aiming for return to normal by June 1st. Congestion at major ports from the Shanghai lockdown will take some time to work through but this is a positive development.

Amid that backdrop, the U.S. consumer, who drives nearly 70% of U.S. economic growth, takes center stage this week with the release of April’s retail sales numbers, earnings reports from several large retailers, and updated housing data. According to a monthly survey from the University of Michigan, consumer sentiment sits near ten-year lows as rising prices, volatile financial markets, and rising rates have taken a toll, but that hasn’t yet put much of a dent in spending outside of rate sensitive markets like housing. The U.S. consumer has demonstrated strong resilience with the help of a robust jobs market and strong balance sheets to support spending and underpin economic growth. This will remain a crucial area to monitor in the months ahead as conditions tighten and society seeks to navigate and resolve supply constraints.