S&P CoreLogic Case-Shiller Home Price Index for March; Chicago PMI for May; Conference Board Consumer Confidence Survey for May; Canada Gross Domestic Product for May
Stocks wavered Tuesday as rising oil prices stoked renewed fears around inflation and how the Federal Reserve will rein in higher prices with tighter monetary policy.
Following the Memorial Day holiday, the first trading day of the week looked set to be defined by familiar concerns: multidecade high inflation and the prospect that an aggressive response from the Fed could spur a recession.
“It may have been a quieter session over the last 24 hours with the U.S. on holiday, but inflation concerns were put firmly back on the agenda thanks to another upside surprise in German inflation, as well as a further rise in oil prices,” said Jim Reid, a strategist at Deutsche Bank.
Stocks rallied into the long weekend as investors received signs that inflation was cooling, and that the Fed may not have to clamp down on policy as hard as once thought. A continued rise in the price of oil could derail that narrative.
“Fed funds futures provided a sense that the direction of travel was similar in the U.S. to Europe, since the implied fed-funds rate by the December [FOMC] meeting ticked up +7 basis points,” said Reid.
Read Barrons.com: Why It Could Be a Good Thing If the Stock Market Ends Lower in May
International stock markets were mixed. The Stoxx Europe 600 fell 0.5%, while in Asia, the Shanghai Composite Index rose 1.2% after the city’s government said a two-month lockdown would be lifted Wednesday.
The shutdown, designed to limit Covid-19 transmission, had slowed the Chinese economy and added to inflationary pressures elsewhere in the world by gumming up supply chains.
Stocks on the Move:
The easing of China’s Covid-19 restrictions has seen a rally in Chinese stocks — including a number of U.S.-listed Chinese tech companies. Alibaba jumped 5% in U.S. premarket trading, with e-commerce peer JD.com 7% higher. Electric-vehicle maker NIO rallied 5%.
Unilever surged 7% in the premarket, after the company said it appointed Nelson Peltz as a nonexecutive director and confirmed his TrianFund Management holds a roughly 1.5% stake in the group.
The U.S. economy will likely slow sharply in the coming quarters but will avoid falling into a recession, said Commerzbank senior economists Bernd Weidensteiner and Christoph Balz.
Many sentiment indicators consistent with recession levels and many negative shocks–from policy tightening to high energy prices–are set to weigh on activity in the short-term, they said.
However, resilient consumer spending is likely to ensure growth in the context of a strong labor market and rising wages.
“We expect the economy to be largely stagnant in the second half of 2023, when the Fed’s rate hikes will have their maximum effect with the usual lags. If further shocks were to occur…a recession would probably be hard to avoid.”
The dollar has found some support as Treasury yields turned higher again and as rising oil prices dampened risk appetite, said ING analysts.
The currency’s gains were limited in Europe, however, because yields were also rising around the world, especially in Europe, although the Federal Reserve’s monetary tightening policy is “built on more solid foundations.”
The EU’s decision to place a partial embargo on oil imports from Russia will also increase concerns about risks to eurozone growth, the analysts said.
Government bond yields rose after a three-day break, lifted by a hawkish speech from a Federal Reserve official on the need to take interest rates beyond a neutral setting.
The rise in yields came as Christopher Waller said in a speech in Germany, that he wants to keep lifting interest rates by half-point increments until he sees signs that inflation is coming down.
“In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target. And, by the end of this year, I support having the policy rate at a level above neutral so that it is reducing demand for products and labor, bringing it more in line with supply and thus helping rein in inflation,” Waller said.
Tim Duy, chief U.S. economist at SGH Macro Advisers, said the market is unsure what the Fed will do in September.
“The Fed is pressing forward with rate hikes, and Waller’s speech should help erase speculation that the Fed will not follow through with another two 50bp hikes or skip a hike at the September meeting,” said Duy.
The Waller speech also was notable for his belief that the Fed can fight inflation without lifting the unemployment rate. He said a cooling in demand spurred by monetary policy tightening will lead to a big fall in job vacancies but only a small increase in the unemployment rate.
Oil prices surged to two-month highs after the European Union reached an agreement that is poised to ban most of Russian oil by the end of the year.
The watered-down embargo covers Russian oil brought in by sea, with a temporary exemption for imports delivered by pipeline, required to bring Hungary on board. The EU said the agreement covers more than two-thirds of oil imports from Russia, and should cut 90% of that country’s crude by the end of this year.
Read: European Union Pledges to Curb Oil Purchases From Russia
“Even though oil advanced to levels that look interesting for selling a top, the positive pressure is too strong for betting on a downside correction in the short run. Shorting oil has become a risky bet, as following the European ban, there is a stronger case building for a further extension of the gains,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
Ozkardeskaya said the “relentless positive pressure” on oil prices on both sides of the Atlantic was worry, even as U.S. inflation figures have been easing. Data released Monday showed Germany’s annual rate of inflation in May posted the highest reading in 50 years.
Oil prices will likely remain above $100 a barrel until there is some hope of a resolution to the Russia-Ukraine war, but growing demand-side concerns may put a lid on the bullishness, said DBS Group Research.
Since the war began, Brent crude has traded mainly in the $100-$120 range. With no end in sight to the conflict, DBS has raised its average Brent forecast for 2022 to $97-$102 from $95-$100 and to $90-$95 from $85-$90 for 2023.