THE WEEK ON WALL STREET
A surge in consumer inflation unsettled investors, leading to a turbulent week of trading on Wall Street. The Dow Jones Industrial Average slipped 1.14%, while the Standard & Poor’s 500 fell 1.39%. The Nasdaq Composite index dropped 2.34% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, lost 3.02%.
INFLATION CONCERNS
The market has been troubled recently by building inflationary pressures. Investors are concerned that rising prices may hurt corporate profits and force the Fed to tighten its monetary policy sooner than anticipated. Worse, investors fear the Fed may have to react more aggressively if it waits too long to act. After back-to-back losses, the retreat in stock prices culminated on Wednesday, following the release of the higher-than-anticipated Consumer Price Index (CPI) report. Stocks managed to claw back some of the week’s losses with a Thursday-Friday rebound, sparked by investors doing some bargain hunting.
CONSUMER PRICES SPIKE
Wednesday’s release of April’s CPI inflamed investors’ inflation fears, as consumer prices rose 0.8% in April and jumped by 4.2% year-over-year. These numbers were above expectations. April price increases were led by a remarkable 10% increase in used cars, with additional pockets of sharp increases, notably in transportation services and commodities. Perhaps equally concerning is that energy costs showed a decline during April, a price weakness that may reverse in the coming months. Core inflation, which excludes the more volatile food and energy prices, was up a more modest 3.0% from April 2020.
THE WEEK AHEAD: KEY ECONOMIC DATA
Tuesday: Housing Starts.
Wednesday: FOMC (Federal Open Market Committee) Minutes.
Thursday: Jobless Claims. Index of Leading Economic Indicators.
Friday: Existing Home Sales. PMI (Purchasing Managers Index) Composite Flash.
THE WEEK AHEAD: NOTABLE COMPANIES REPORTING EARNINGS
Tuesday: Walmart (WMT), The Home Depot (HD).
Wednesday: Cisco Systems (CSCO), Target (TGT), Lowes (LOW), JD.com (JD), The TJX Companies (TJX), Deere & Company (DE).
Thursday: Kohl's Corporation (KSS), Ross Stores, Inc. (ROST), L Brands, Inc. (LB).
FINAL THOUGHTS
Well, the inflation data arrived (as anticipated). And it was ugly (as anticipated). And the Fed has continued to be patient (as anticipated). This is not to suggest inflation is not happening (it is). It is to suggest this has not snuck up on anyone. It’s simply a sellable headline for financial media outlets.
The larger concern is probably which type of inflation. Specifically, wage inflation showed a big jump in April. This may present the biggest problem: Washington (as often) appears to be completely painting the Fed into a corner with generally reckless fiscal policy – namely the continued extension of unemployment benefits in a re-opening economy. By effectively paying some not to work, it is forcing employers to increase wages to attract workers. And this, in turn, is driving the inflation narrative.
Pair the labor supply constriction with the already disrupted supply chains and you start to see the picture the market is digesting: just how do we price this thing going forward? Which areas of inflation are temporary as a result of Covid? Which are unintended consequences of policy decisions? Stay tuned... 
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May 17, 2021
