Research
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Market update
Financial markets continue to be driven, in part, by global trade and geopolitical developments such as the U.S.-Iran conflict. Although discussions continued in mid-May regarding a ceasefire between the two countries, oil prices continued to climb with the Brent crude spot price rising by 7.9% to $109/barrel. The positive earnings season in the U.S., the strongest in four years, has led equity markets to broadly shake off the economic risks associated with the war.
Kevin Warsh was confirmed as the new Fed Chair on May 13th in a historically narrow vote. He will replace Jerome Powell at a time of rising inflation and ongoing pressure from the administration to cut interest rates. This creates uncertainty around U.S. rate policy direction.
Something encouraging: April U.S. Labor Data
Labor data for April in the U.S. surprised to the upside, with non-farm payrolls rising 115k vs. a 67k consensus estimate (with prior months, in aggregate, revised modestly lower), and showing broad strength across both goods and services sectors. The unemployment rate held steady at 4.3%, though declining labor participation rates have helped to mask the underlying softness. Furthermore, April ADP private payrolls printed at 109k, the largest monthly gain in over a year, while March JOLTS job openings came in at 6,866k, above the 6,850k consensus. These facts point to a resilient labor market in the U.S., giving the Federal Reserve latitude to monitor the impacts of elevated oil prices on growth and inflation amidst elevated uncertainty.
Something cautionary: Higher inflation measures
U.S. Headline CPI was marginally above expectations, and remains above the Fed’s target, coming in at 3.8% year-over-year (compared to an average expectation of 3.7%). Similarly, core CPI came in at 2.8% year over year, highlighting persistent underlying inflation pressures. This surprise increase was largely driven by energy, with elevated oil prices feeding into headline inflation and beginning to show early signs of a broader pass-through into core components.
Pipeline inflation indicators worsened, with both headline and core PPI coming in well above expectations, signaling increasing upstream price pressures. Import and export prices also rose sharply (1.9% and 3.3% m/m), reflecting elevated, energy-driven cost pressures.
Something curious: Consumer staples key trends
The Consumer Staples sector comprises companies that produce and distribute essential goods such as food, beverages and household products, which tend to exhibit relatively stable demand across economic cycles. This underpins the sector’s defensive characteristics.
Key Trends:
- Positive forward earnings expectations ordinarily arise from the resilience of U.S. consumers.
- However, consumer staples companies face several headwinds in the current environment:
- Pricing is decelerating, reflecting reduced pricing power.
- Cost pressures continue to weigh on margins: inflation across commodities and tariffs persists with productivity improvements only partially offsetting these factors.
- The consumer is showing signs of price sensitivity and cautious “trade-down” purchase behavior currently, with a clear split between resilient higher income and pressured lower-income consumers.
In aggregate, the relative outlook for the sector will continue to be determined by broader macroeconomic conditions.
WTW news
Thank you for taking the time to read this edition of What To Watch, brought to you by Jon Pliner, global chief investment officer; Jim Neill, managing director; Garrett Goniea, manager; Madison Rugh, senior analyst and the WTW Investments team.
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