Earnings Come Into Focus – Domestic Equity Update

The Wilshire 5000 Total Market Index, which includes every publicly traded U.S. company, has lost roughly $10 trillion in mark-to-market price since the beginning of the year, down from $53 trillion. Equities currently account for about 33% of household wealth.

Some analysts note that recent earnings from certain companies as misleading. Increases in revenue, to some extent, may be attributable to an inflationary increase in product and service prices rather than improved sales. Analysts typically view volume increases as a more favorable trend than inflationary price increases.

A strong U.S. dollar weighs on international earnings, which make up 40% of the S&P 500 Index earnings. These are generated by multi-national companies with revenue largely dependent on overseas sales. Supply constraints and increases in inventory and labor costs put pressure on corporate earnings projections for the second quarter. (Sources: S&P, Wilshire Associates, Bloomberg)

Rates Held Steady In May – Fixed Income Review

Short-term and long-term Treasury bond yields fell moderately in late May, which is referred to as a shift down in the yield curve. Such a dynamic may be indicative of interest rates beginning to level off following a rapid rise over the past few months. The Federal Reserve indicated that it would raise short term rates again in June and July, though not as much as previously expected.

The average rate on a 30-year fixed mortgage fell slightly in late May to 5.10% from 5.25%, offering some reprieve to homebuyers. Mortgage rates are still well above the 3.11% average seen at the end of last year.

The retreat in U.S. Treasury bond yields spilled over to municipal and corporate bonds, where yields fell modestly for the month. Overall bond prices rose as yields fell for nearly all domestic bond sectors.

Regardless of a possible let up in the Fed’s tightening trajectory, further increases are expected over the next two months along with Fed balance sheet reductions that will place additional pressure on rates. (Sources: U.S. Treasury, Federal Reserve, FreddieMac)

Growing Inventories Means Lower Prices & Discounts Could Be Coming – Consumer Retail

As the pandemic created supply constraints over the past two years, companies learned to stock up on materials and finished products in hopes of alleviating future supply chain snags.

Now that constraints have lessened and various supply chains have resumed operations, companies have recently accumulated raw materials and built stockpiles of finished products at a fast pace. Historically, increases in inventory levels for companies is seen as an indication that consumer demand for their goods might be weak. As inventories swell, companies are eager to reduce stockpiles to the point of discounting, which ultimately means lower prices for consumers. (Source: Federal Reserve Bank of St. Louis)

Credit Usage Heading Higher – Consumer Credit

As pandemic assistance funds vanish, consumers turned to savings and credit to pay for essentials. Con­sumers have been tap­ping into record-high personal sav­ings that were accumulated during the pan­demic, in order to keep up with in­fla­tion.

While overall wages have risen roughly 6% over the past year according to Labor Department data, the increases have not kept up with inflation running at over 8%. As households start to experience shortfalls, many resort to credit in order to meet month-to-month expenses.

Auto loans and credit card debt saw the largest usage increases as tracked by the Federal Reserve over the past few months. Mortgage debt also rose, but mostly at the upper end of the credit score scale. Credit scores on newly originated mortgages remain relatively high, reflecting continuing high lending standards by lenders. The median credit score of newly originated mortgages was 776 during the first quarter of 2022. Analysts note that median credit scores may begin to fall as consumers tap credit cards and exhaust their cash savings. (Sources: Labor Department, Federal Reserve Bank of New York; Household Debt and Credit Report (Q1 2022)

Global Commodity Prices May Be Signaling That Inflation Is Easing – Commodities Market Update

Heightened commodity prices have largely driven inflation over the past year. Now, non-energy commodity prices are beginning to ease globally as demand for various commodities is softening.

The Global Price Index of All Commodities tracks the price of widely-traded commodities including copper, wheat, gold, lumber, and sugar. Broad commodity prices retracted in April after reaching record levels in March, with commodities related to building and manufacturing seeing the largest drop. Simultaneously, food-related commodities continued to see rising prices over the past two months. Historically, a drop in building materials is indicative of a broader slow down in economic activity, as home builders and manufacturers prepare for an expected decrease in demand. As commodity prices ease, so does inflation, as the manufacturing sector reigns in costs to stay competitive. (Sources: International Monetary Fund, Global Price Index of All Commodities, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PALLFNFINDEXQ, June 7, 2022)