-Darren Leavitt, CFA

US equity indices fell across the board for the week on a more hawkish than expected statement from the Federal Reserve’s Open Market committee meeting.  In the Q&A after the release of the FOMC statement, Fed Chairman Jerome Powell provided a more dovish tone.  The Fed announced no change to the current Fed Funds rate and said they would continue their asset purchasing program of 120 billion a month.  The Chairman did say that the committee would telegraph to investors their intention to end the program before the actual taper would begin.  The Fed increased the interest on excess reserves by five basis points to 0.15% and raised the reverse purchase rate by five basis points to 0.05%.  A change in the Fed’s Dot Plot, which lays out each member’s expectations for monetary policy, showed a rate hike by the end of 2023 rather than the prior expectation of 2024.  Additionally, seven members thought it might be appropriate to raise the Fed Funds rate in 2022.

The change to the expected path of interest rates was reiterated on Friday by St. Louis Fed President Bullard.  In an interview with CNBC, the usually dovish Bullard said he was one of the members who thought the Fed Funds rate should increase in 2022.  He also said the Fed should not be buying mortgage back securities.

The rhetoric out of the Fed strengthened the argument that we have seen peak growth and peak inflation expectations.  That narrative took a chunk out of the reflation trade that has favored valued-oriented cyclicals and the commodity complex.  At the end of the week, it was easy to see the divergence in value versus growth issues.

The S&P 500 lost 1.9% for the week, the Dow fell 3.4%, the NASDAQ gave up 0.3%, and the Russell 2000 led declines with a loss of 4.2%.  The US Treasury curve flattened on the week, with the 2-year note yield increasing by eleven basis points to 0.26%.  The 10-year yield fell by one basis point to close at 1.45%, perhaps validating the Fed’s notion that much of the anticipated inflation will be transitory.

Interestingly, Oil was able to hold up relatively well while other parts of the commodity complex sold off.  WTI fell $0.67 on the week to close at $71.00 a barrel.  On the other hand, gold prices fell nearly 6% or $110.7 to close at 1768.70 an Oz.  Copper prices fell over 8% to close at $4.158/lb.

Economic data for the week came in mixed.  May Retail Sales fell -1.3% on a month-over-month basis and was less than the street consensus estimate of -0.6%.  Initial claims regressed on the week, increasing 37k to 412k versus the expectation of 350K.  Continuing claims were essentially unchanged at 3.518 million.  The Producers Price Index or PPI came in hotter than expected, but investors seemed unfazed by the announcement.  The reading increased 0.8% month over month versus the expectation of 0.5% and came in 6.6% on a year-over-year basis.

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