Investors look past inflation pain

The US-Iran conflict remained on the quieter side last week, though not without its tense moments, as both sides appeared willing to engage through more diplomatic channels.  The relative calm helped push oil prices lower again, although prices still remain considerably elevated compared to the start of the year.

Last week’s economic data underscored the continued inflationary fight facing the Federal Reserve, which could intensify as the full severity of the supply chain disruptions comes to light. April core PCE, which excludes volatile elements like food and energy prices and is the Fed’s preferred inflation measure, rose 3.3% year-over-year. While that was in line with forecasts, it remained well above the Fed’s 2% target. After running above target for nearly five years, the trend appears likely to continue into the foreseeable future. In response, markets are increasingly expecting the Fed’s next policy move to be a rate hike.

Despite the inflation concerns, and perhaps encouraged by ongoing talks in the Middle East, investor sentiment toward US business health remains constructive. Stocks hit new highs and corporate credit spreads nearly returned to multi-decade lows. Demand for US investment-grade bonds has been especially strong; corporate issuers have already raised over $1 trillion year-to-date, the fastest pace since 2020.

Other economic data offered a mixed picture. First-quarter real GDP was revised down to 1.6%, from 2.0% prior. Consumer spending and business investments were also adjusted lower, though housing investment was revised up. The labor market continues to show resilience, with initial jobless claims of 215,000 last week remaining at relatively low levels.