- Stock markets have remained tightly range-bound over the past two weeks, with the S&P 500 holding between 4,100 and 4,200.
- The direction of the markets are clearly being determined by inflation and Federal Reserve actions.
- A recent World Bank report warns of slowing global growth and potentially continued elevated inflation in the years ahead.
- Higher borrowing costs and lofty gas prices will likely cause downward pressure on consumer spending.
Financial markets are still having a tough time finding direction as a slew of economic data and projections for slower growth clash with optimism over corporate profits and a resilient consumer. Over the past two weeks, the S&P 500 Index has remained in a tight trading range between 4,100 and 4,200—reflecting that volatility has declined, with smaller, day-to-day market movements. This sideways market is an evident result of investor sentiment from the selloff in the stock and bond markets earlier this year, combined with varying projections for economic growth. Most recently, the World Bank warned that a prolonged stagflation period—a time of high inflation and below-trend growth—could be on the horizon while cutting its forecast for 2022 global growth to just below three percent. The report states that recession may be difficult to avoid for some countries as high debt levels have accumulated for years in emerging economies. Data from the release shows reduced growth projections for China due to COVID-19 lockdowns and forecasts 2.5 percent growth in the US and Euro-area. The World Bank data says the world economy expanded by 5.7 percent in 2021.
Inflation continues to be the largest risk for the global economy and financial markets, and worries continue over the measures central banks are taking to control it. Inflation and the Fed are clearly steering the market as continued rate hikes and its "quantitative tightening" program ripple through financial markets. Meanwhile, the European Central Bank and other central banks globally are taking similar steps. The consumer has been caught in the middle of these actions. Rising borrowing costs traditionally put downward pressure on consumer spending, which makes up over two-thirds of US GDP. This may be compounded by inflation's continued effect on goods like food and fuel. Today, crude oil prices breached the $120-per-barrel level in trading for the second time since 2008. Per the American Automobile Association, national gas prices reached a new record today of $4.96 per gallon for regular unleaded gas.
Investors will keep their eyes peeled this Friday when the May release of the Consumer Price Index will show whether inflation has begun to cool. So far, it seems the survey consensus shows economists expect that prices increased in May but held relatively flat compared to year-ago levels. The year-over-year projection is for 8.2 percent, compared to 8.3 percent in April. If that holds true, it may keep pressure on Fed officials to continue on their aggressive rate hike path and may spell more turbulence for markets, especially if there are any further surprises in the data.