The market was rocked this week by a flurry of economic and political data. Some major developments included new inflation data, changes in Federal Reserve leadership, and rising U.S. Treasury yields. The market swiftly corrected on Friday following a rally during previous trading sessions. The combination of weaker economic data and ongoing political tensions will likely continue to shape equity market sentiment in the upcoming weeks.
Below are five major economic and capital market developments this week to keep on your radar.
1. April CPI Report
April’s new CPI report came in hotter than expected. The Consumer Price Index (CPI) rose by 0.6% MoM on a seasonal basis, equivalent to 3.8% YoY increase.1 One of the main drivers of this annual increase was the 3.8% YoY rise in energy prices, while all items minus food and energy only rose by 2.8%.
Sustained political tensions in the Middle East could produce more unfavorable readings in the upcoming months and would put pressure on the Federal Reserve’s monetary policy.
2. Oil Prices Continue to Rise Amid Geopolitical Tensions
Oil prices rose by more than 3% on Friday amid heightened geopolitical tensions in the Middle East. The price of crude oil reached $106/barrel on Friday, representing a 11% weekly gain.2 Oil ETFs rallied by around 3-4% during the trading week.
Rising oil prices will likely continue to put pressure on the Fed’s interest rate policy and could also continue to push treasury yields upward.
3. New Federal Reserve Chairman
Kevin Warsh has been appointed the new incoming Fed Chairman, following a strong pushback from President Donald Trump on his rate policies.3
The Federal Reserve recently chose to keep rates steady during its recent meeting, due to fears of the consequences of prematurely cutting rates amid the current supply-side and inflationary tensions.4
While Warsh has been more vocally supportive of potential interest rate cuts, the surge in food and energy prices will make this feat difficult in the short term.
4. Rising Treasury Yields and Equity Market Impact
The rate on U.S. Treasury yields recently surged to a 1-year high of 4.6% amid new inflationary concerns in the market.5 Additional pressure may force yields back to the previous 2023 high of nearly 5% under the Biden Administration.
One important factor to monitor is the impact on U.S. equity markets, which currently track at multi-year highs in terms of valuations. Rising yields may push more investors in the market to prefer treasuries over equities.
5. Semiconductor Boom Reverses This Week
Semiconductor stocks posted strong gains during the past week, but began to correct during this trading week. The iShares Semiconductor ETF fell by more than 3% this week, following its massive rally during the previous trading week.
However, these equities have rallied by more than 60% YTD, well ahead of the S&P 500 and other sectors.6
Semiconductor giants like Nvidia have historically been some of the main drivers of the S&P 500’s rally. Any setbacks could be detrimental, especially if they are paired with a broad-based correction in tech equities.
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