The Lookout | Week of May 16, 2022

The Lookout | Week of May 16, 2022

This week, Simon Lack of SL Advisors provides his insights into the Fed’s challenging path forward, and Dan Rudnitsky of SMH Advisors shares what he’s watching. Read more below.

Coming this week on Catalyst Insights, Hunter Frey will be sharing a Chart of the Week.

Major Market Events:

Tuesday, May 17:   Fed Chair Powell and ECB President LaGarde Scheduled to Speak, US Retail Sales Report

Simon Lack and the team at SL Advisors, Portfolio Manager of an energy infrastructure fund

• Investors won’t hear it said this way but engineering an orderly fall in stock prices is one of the Fed’s goals. Former NY Fed president Bill Dudley, no longer burdened by the requirement to speak responsibly as a senior Fed official, has warned that the Fed is going to tighten financial conditions enough to push up the unemployment rate.
• The Fed’s reinterpreted mandate places greater importance on achieving maximum employment. Powell hasn’t offered any warnings that unemployment needs to rise. In a fascinating excerpt from his press conference, he noted that job openings were equal to almost twice the number of unemployed, and said they were trying to reduce this imbalance. A perfect outcome for the Fed would see a drop in job openings without a commensurate increase in unemployment, making possible the vaunted “soft landing”.
• Although the CPI and PPI reports showed prices continue rising at a fast clip, ten-year inflation expectations derived from TIPs dipped to 2.74%, having recently touched 3%. Since CPI, which is the index TIPs follow, typically runs 0.3% – 0.4% higher than the Fed’s preferred Personal Consumption Expenditures Index, they can plausibly conclude that investors are buying the narrative that inflation will return to 2% within a couple of years.
• In sum, lower stock prices, a steepening yield curve and falling long term inflation expectations are a positive grade on the FOMC’s report card. Investors may not feel quite as sanguine after another volatile week, but Jay Powell might permit himself a moment of quiet satisfaction.

Daniel Rudnitsky, SMH Advisors, and Senior Portfolio Manager of an income strategy

• The retail sector will dominate the earnings calendar with several major retailers due to report this week. The report on retail sales is also one of the bigger economic updates expected to drop.
• Federal Reserve Chairman Jerome Powell will be giving a talk at a conference on May 17. The market will be listening closely in anticipation of a half-point interest rate hike at the June and July meetings of the Fed’s policymaking committee.

Thank you for reading The Lookout. Come back next Monday for more insights on what investors can expect in the markets.