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Markets seemed to forget for a moment that Janet Yellen was no longer chair of the Federal Reserve when she let it slip on May 4 ^th that, “rates will have to rise somewhat.” She was quick to walk that back, clarifying a little later that day that she was neither predicting nor recommending that the Federal Reserve raise rates as a result of President Biden’s spending plans, as reported by The Wall Street Journal. Stocks nonetheless closed sharply lower, led down by the technology sector.

The month’s first week ended on another dissonant note as the April jobs reported came in well short of expectations, with just 266,000 jobs added. Expectations had been for as high as 1,000,000 so it was a major miss, setting off considerable speculation as to what went wrong. For their part, stocks took little issue with the number, rallying strongly to push the S&P 500 up 0.7% to 4232, a new high. The Nasdaq climbed 0.9%. The apparent conclusion: the Fed’s focus on jobs would lead them to stay lower for longer on rates – a good approach for equities.

Inflation inflates

Concerns over inflation and an eventual tightening by the Fed, remained front of mind. Readings on both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in hotter than expected. Consumer prices rose 0.8% in April, and 4.2% for the trailing 12 months, up from just 2.6% on trailing basis for March and the biggest one-year increase since 2008. Producer prices increased 0.6% on the back of a 1.0% rise the previous month and well ahead of expectations of 0.3%.

The Fed’s favorite inflation gauge, Core Personal Expenditures Price Index (CPE), also exceeded forecasts, rising 3.1% on an annualized basis, the biggest jump since 2001. Economists had anticipated an increase of 2.9%.

The debate continued on exactly how “transient” these numbers were – to use a term that is another Fed favorite – but investors had a glimpse of how markets might react to a sustained rise in price levels and the start of “tapering.” By Wednesday of that week, both the Dow and the S&P 500 had concluded their worst three-day period in nearly seven months, down about -4.0% and -3.4%, respectively.

Still, the good news generally outweighed the bad as the economy continued to reopen. Weekly jobless claims trended down, hitting post-pandemic lows. A second reading on U.S. GDP growth confirmed the 6.4% 1Q performance. The April Index of Leading Economic indicators continued to signal growth. For the month, the index rose 1.6%, following a 1.3% rise in March. It was the best gain since last July. Finally, while Fed watchers started to discern a slight shift in tone in the Fed’s Open Market Committee April notes, they left both the funds rate and the asset purchase program unchanged for now.

In other developments, the Biden Administration’s $6 trillion budget proposal is now on the table and open for debate. Covid vaccinations, while no longer daily headline news, had topped 300 million doses in the U.S. as of early June.

Supply chains

A few strains in the system popped up during the month, visible in rising prices for commodities like copper and a sharp decline in single-family housing starts, down more than 13% in April. The issue here appeared to be more about supply than demand, and data out of the Census Bureau provided support for this thesis – the agency reported that supply chain constraints have caused about 15% of builders to put down concrete foundations but hold off framing, thereby tossing a spanner into the home buying works.

While the markets were inclined to look past all this, these numbers were not without “transitory” impact. Volatility could be seen in the action of the CBOE Volatility Index (VIX), which started May around 18, jumped to 27.59 on May 12, and then fell to 16.76 at month’s end. The yield on the 10-year performed a similar round trip, opening the month to yield about 1.6%, climbing to 1.692% on May 13, then falling to about 1.58% on the month’s last trading day.

May closed on an upbeat note, and a nod in favor of the “rotation trade,” as financials, industrials, and commodities outperformed. Yellen again weighed in, with Bloomberg reporting that “she sees the burst in prices as temporary, though likely to last through the end of 2021.” This somewhat elastic definition of the word “temporary,” will no doubt give markets something new to ponder as the summer goes on.