Seven-Week Rally Tested by Inflation Concerns and Energy Disruptions

Two hotter-than-expected inflation reports and a lack of progress in negotiations to end the war in Iran created havoc in some corners of the financial markets last week. Oil prices surged again while the Strait of Hormuz remained effectively closed, disrupting the world’s supply of essential crude. The S&P 500 reached record highs on Thursday before tumbling on Friday but still managed to eke out its seventh straight week of gains. Energy was the top-performing market sector last week, followed by Consumer Staples, while Consumer Cyclicals and Real Estate were the laggards. The small caps of the Russell 2000 snapped their multi-week winning streak. Friday’s global bond market sell-off propelled the yield on long bonds (30-year Treasuries) to its highest level since June of 2007 (5.16%). Yields above 5.0% have been somewhat of a danger zone for borrowing costs in the past. The benchmark 10-year Treasury ended the week at its highest level in more than a year.

Consumer Prices Accelerate as Energy Drives April Inflation Spike

The Consumer Price Index rose 0.6% in April after rising 0.9% in the previous month. Over the last 12 months, consumer prices have increased 3.8%. Prices excluding food and energy increased 0.4% in April and were up 2.8% over the past 12 months. In April, prices for energy rose 3.8%, accounting for over 40.0% of the overall monthly increase. Shelter prices also increased in April, rising 0.6%. Prices for food rose 0.5% last month.

Eye on the Week Ahead

The primary economic release of note this week focuses on housing starts and permits.