Few investors should have been surprised when the Federal Reserve raised interest rates after its May meeting.
Throughout April, Fed Chair Jerome Powell and several Fed Governors talked about the need to keep raising short-term rates to help manage hot inflation. They suggested that a series of rate hikes throughout the summer may be necessary to cool prices. As the May meeting came to a close, markets cheered as traders expressed confidence the Fed would be able to guide the economy to a “soft landing” and avoid a recession. But in the days that followed, stock and bond market volatility picked up as the reality of higher interest rates started to settle in.
What’s next? Fed Governors have prepared us for higher short-term rates in the coming months. But some economists point out that the bond market has already done some of the work for the Fed, meaning traders have already pushed longer-term interest rates higher. For example, the yield on the 10-year Treasury has doubled this year.
We’re in a transition period with the economy. High inflation is forcing the Fed into a cycle of raising interest rates. It’s best to prepare for more volatility as the markets adjust to what’s ahead.
Inflation Upends Stocks
Stocks gyrated between gains and losses last week until sliding lower on Friday’s hot inflation report, which heightened worries over a more aggressive Fed and a further economic slowdown. Stocks moved higher to begin the week, despite rising bond yields, a profit warning from a major retailer, and Senate testimony by Secretary of Treasury Janet Yellen, who said that inflation was likely to remain elevated.
Stocks turned lower later in the week on renewed concerns of an economic slowdown, sparked by a downward revision in The Federal Reserve-Atlanta’s real-time estimate of second-quarter GDP growth and a drop in new mortgage applications. Investors lightening up on stocks ahead of Friday’s inflation report may have also contributed to Thursday’s selling.
Consumer prices rose 8.6% year-over-year in May, marking the highest rate since December 1981. Price increases over the last 12 months were driven by a 34.6% jump in energy prices and by food costs, which climbed 10.1%. Used car and truck prices, which had seen three straight months of declines, rose 1.8% from April, while airfares soared 12.6% in May.4
May’s inflation exceeded economists’ forecasts and dashed the hopes that inflation had plateaued. In a separate economic report on Friday, real wages (net of inflation) fell 0.6% in April and were lower by 3% from 12 months ago.5
This Week: Key Economic Data
Tuesday: Producer Price Index.
Wednesday: Retail Sales. FOMC Announcement.
Thursday: Jobless Claims. Housing Starts.
Friday: Industrial Production. Index of Leading Economic Indicators.
Source: Econoday, June 10, 2022
This Week: Companies Reporting Earnings
Thursday: Adobe, Inc. (ADBE), The Kroger Co. (KR).
Source: Zacks, June 10, 2022
What is Mindfulness?
You may have heard various definitions of mindfulness here and there or have your own ideas about what it is. Do you completely clear your mind? Is there more to it?
Interestingly, mindfulness is as simple as it sounds. It refers to the state of being fully present in where you are and what you’re doing. You can practice mindfulness as you're driving, as you’re walking your dog, or as you’re playing with your children. It’s practicing being in the here and now and not letting your mind take you out of the present moment. These obsessive thoughts can lead to anxiety and stress.
To practice mindfulness, take a simple activity, like drinking your cup of coffee, and think about every sensation you’re experiencing. It takes practice but is worth it to improve your mental strength!
Tip adapted from Mindful7
Cheetah gazing into the distance, Namibia, Africa
Footnotes and Sources
4. CNBC, June 10, 2022
5. CNBC, June 10, 2022
6. IRS.gov, January 3, 2021
7. Mindful.org, July 8, 2020
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