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Weekly Market Recap

Last week’s biggest headline was consumer price inflation (CPI) which registered +5.0% y/y in May, the first “five-handle” US inflation print in nearly 13 years. Under the covers, however, the report was less alarming. Core CPI, which strips out volatile food and energy prices, was just +3.8% y/y.

Moreover, more than half of the total came from just six components associated with the release of pent-up demand: food away from home, lodging, airfares, rental cars, used cars, and vehicle insurance.

Markets paid attention to these details, and as a result, inflation-sensitive asset classes rallied last week. Equities were led by technology stocks, many of which have long-dated cash flows that are especially sensitive to discount rate assumptions. The return of tech leadership in equities dates to mid-May, shortly after the previous month’s CPI report which showed similarly transitory drivers underneath an upside headline surprise.

Bond markets also rallied, as 10y Treasury yields fell 10 basis points to 1.45%, their lowest level since early March when rates were still rising quickly. Credit spreads were stable, pushing corporate and muni bonds prices higher (and yields lower) in sync with Treasuries. Mortgage rates also fell last week.

Most commodities traded in a narrow range as inflation fears eased. That said, oil ticked higher by approximately $1/barrel, pushing WTI above $70 for the first time since the outset of the pandemic.

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Weekly Market Recap

Investors drove a “rotation trade” in US equity markets last week, with
weakness in large cap technology stocks offset by strength in cyclicals
(energy, financials, industrials) and small/midcap companies. Then on Friday, equities of all stripes got a boost when the US Nonfarm Payroll Report came in significantly below expectations, calming inflation fears and reassuring investors that the Fed will remain accommodative for the foreseeable future.

Bond markets rallied last week. Benchmark 10-year US Treasury yields fell 5 basis points, reversing most of the increase from the final week of April.
Meanwhile, credit spreads remained at or near YTD tights, allowing the price gains in Treasuries to flow through to corporate and municipal bonds.

Commodity prices rose, with oil (WTI) closing at nearly $65/barrel even
before a cyberattack on Colonial Pipeline Co led to a shutdown of the largest pipeline network in the eastern US. Many other commodity prices moved higher as well, including agricultural products, building products, and textiles.

As mentioned above, the monthly jobs report came in well below
expectations, touching off a loud political debate about whether the best
solution to slowing job growth is a reduction in unemployment benefits that some believe are distorting incentives, or an increase in childcare support coupled with significant infrastructure spending.