Market Notebook

PRICE ACTION:
Equity prices, as measured by the ticker SPY, closed higher while bond prices, as measured by the ticker BND, closed lower over the last week.

SPY     +0.21%
BND     -1.10%

TECHNICAL ANALYSIS:
SPY price appears to be trending higher.

BND price broke down sharply on Friday on inflation concerns, pushing the price out of the consolidation range into what could be considered a downward trend.

SENTIMENT:
The April CPI report delivered the bad news investors had been bracing for but hoping to avoid, with headline inflation accelerating to 3.8% year-over-year, the highest since May 2023, while core inflation rose to 2.8% annually with a monthly gain of 0.4%, the hottest monthly core reading since January 2025.  Markets initially absorbed the data with resilience as stocks pushed to new all-time highs on Wednesday and Thursday, before Friday’s combination of surging oil, spiking yields, and geopolitical uncertainty broke the market‘s composure. Traders largely expect the Fed to hold rates steady for the rest of the year, though the odds for a rate hike have risen to 20% for October and are pegged at 30% for December.  The prevailing sentiment remains constructive on equities, driven by the AI earnings supercycle, but the bond market is issuing a clear warning that the inflation story is not resolved.

ECONOMY AND FUNDAMENTALS:
The week was marked by three simultaneous storylines: a historic inflation print, a new Federal Reserve leadership era, and a U.S.-China summit that offered cautious optimism on multiple fronts.

On inflation, the April CPI report showed that while energy prices, particularly gasoline, up 28.4% annually, remained the dominant driver of headline inflation, the breadth of price pressures is widening. Real average hourly wages slipped 0.5% for the month and fell 0.3% annually, meaning workers are falling behind inflation.  The April PPI data, released Wednesday, added to the concern: the services index surged 1.2% for the month, the biggest monthly gain since March 2022, with two-thirds of the move attributed to a 2.7% rise in trade services, a sign that tariff costs are beginning to have a larger impact on prices beyond the energy channel. 

Friday marked the close of the Jerome Powell era at the Federal Reserve. Kevin Warsh, confirmed by the Senate on Wednesday, now grapples with an increasingly complicated inflation picture as he takes the helm.  Warsh’s two stated priorities, accelerating balance sheet reduction and fostering “messier,” more debate-driven FOMC meetings, both carry the potential to unsettle a bond market that has been relying on institutional continuity. Selling trillions of dollars of long-term Treasury bonds to reduce the Fed’s $6.7 trillion balance sheet would put additional upward pressure on yields.  The market‘s early verdict on the Warsh era, expressed through Friday’s surge in long-end yields, was not reassuring.

On the geopolitical front, the U.S.-Iran ceasefire remained deeply fragile throughout the week. Trump declared the truce “on life support” Monday after rejecting Iran’s latest counteroffer as “totally unacceptable.”  Meanwhile, President Trump traveled to China for a two-day summit with President Xi Jinping, accompanied by 16 top U.S. executives. Trump touted “fantastic” trade deals and said a number of problems had been resolved, though no major agreements were announced. Trump said both he and Xi “feel very similar on Iran” and share a desire to bring the conflict to an end, a potentially significant development, as Chinese diplomatic pressure on Tehran could provide an off-ramp that purely bilateral U.S.-Iran talks have so far failed to deliver. Oil prices ended the week back above $108 Brent, erasing much of the prior week’s decline and reigniting inflation concerns heading into the summer.

All the best during the week ahead!

Disclaimer: Nothing in this discussion should be considered investment advice. The content of this discussion is strictly my personal opinion and subject to change at a moment’s notice. Investment advice can only be provided to you by your investment professional and not by a general market discussion such as this one. If you wish to speak with an investment advisor, contact us. We can probably help.