It was not a great week for markets as the major indices fell sharply early in the week before recovering a good chunk of those losses towards the end.
Inflation fears combined with the Colonial Pipeline hack to push many stocks lower, but markets rallied with mixed economic data later in the week. Commodities started the week at or near fresh highs and supply shortages fed into pre-existing concerns about inflation. Both high commodity prices and inflation concerns started to ease a bit by the end of the week.
Overall Inflation vs Industry Price Hikes
When Consumer Price Index (CPI) data was released on Wednesday, many investors took the 0.8% rise in April as confirmation of rising inflation. Economists were expecting only a 0.3% rise in CPI after it rose by 0.6% in March. However, while the headline number was surprising, a closer look at the numbers shows there's a lore more going on than across the board price increases that many expect after massive stimulus packages.Used car prices have been surging higher in response to the chip shortage that has automotive manufacturers unable to meet the demand for new cars. Consumers and even rental car companies have been forced into the used car market where higher prices can get more cars to market, which isn't possible with the new-car supply.
Used car and truck prices increased 10% last month, the highest one-month rise since the data started being collected in 1953. This massive price surge accounted for more a third of the overall seasonally adjusted CPI increase. Thus, the rise in CPI was closer to 0.5-0.6% which happens to be where analysts were expecting. Additionally, even this rise can largely be attributed to base effects. When looking at core CPI inflation year-over-year, April showed a 3.0% rise but only a 2.2% increase when adjusting for base effect using a 14-month sample with February 2020 as the fixed base. The Fed looks to be nailing its target for a 2% inflation rate during the pandemic even!
Mixed Economic Data
Inflation numbers weren't the only economic data released this week. Mixed results for retail sales and unemployment claims. Initial claims was a nice surprise on Thursday as analysts were expecting a small rise to 510,000 claims from the previous week’s 507,000. Instead new claims dropped to 473,000, the lowest number since before the pandemic and "only" a little over DOUBLE the average amount of weekly claims before COVID-19.The strong unemployment claims data was then followed with Friday’s retail sales data that showed no growth in April. Sales remained unchanged at 0% growth after rising 10.7% in March, analysts were expecting a 1.8% increase in April. The massive drop is largely due to stimulus checks heavily affecting the March numbers but economists were still expecting a small rise this past month. Despite this, analysts still expect a strong rise in the coming months particularly in the restaurant/bar industry. The drop in retails sales may actually be a positive for stocks as it provides a data point that suggests the economy is perhaps not running as hot as previously believed.
Old vs New
Many might consider investing in commodity futures or commodity-based companies as boring but those who invested in them early in the pandemic are laughing now. Commodity prices have been rising with production unable to meet demand as the economy recovers faster than many expected. What’s happening with commodities now is similar to what the automotive industry is experiencing but on a larger scale as materials such as lumber are trading at nearly four times the usual price.Meanwhile, the cryptocurrency investors have had a rough week as Dogecoin finally met some resistance and Bitcoin is down roughly $10,000 from where it started the week. Tesla (TSLA) is also no longer accepting Bitcoin as payment, citing environmental concerns over the impact of Bitcoin mining as the reason. Elon Musk didn’t seem to mention Bitcoin losing value or Tesla’s "testing" of Bitcoin’s liquidity as reasons for not accepting the cryptocurrency. Maybe dealers will start accepting Ethereum then as the currency still ticked upwards for the week and is on a massive rise since the pandemic from around $150 to $4000.
All that said, the S&P 500 lost 1.39%, the Dow Jones Industrial Average dropped 1.14%, and the NASDAQ fell 2.34%.