Stocks drifted lower for the second straight week, searching for the next catalyst that will push prices higher. The S&P 500® index slid 0.4 percent last week, following the 1.4 percent decline of the previous week. The index has now treaded water since the middle of April. Investors are no longer surprised by the strength of first quarter earnings, well aware of the improving Covid-19 outlook, although not everywhere, a little nervous regarding the Fed, curious about the volatility in cryptocurrencies, and uncertain about the negotiations around the President’s infrastructure bill. This mix has led to a market that is unsure of its next move. At the same time, the S&P 500 has shown a certain resiliency. At its weakest, the brief decline at the start of the week of May 10 took prices down by just 4.0 percent, and they have since recovered half of that pullback. And the spike in volatility during that brief selloff has since receded.

Bond yields have been in a similar holding pattern, but one that extends back further into March. The ten-year Treasury note finished last week at a yield of 1.62 percent, virtually unchanged on the week. After a steady rise at the start of the year the yield on the ten-year note first reached 1.62 percent in early March. Since then it has traded in a range of just 20 basis points, reaching a high of 1.74 on March 31, and a low of 1.54 on April 22. And Treasury market volatility has declined steadily throughout. 

Inflation expectations also took a breather last week. The five-year breakeven rate fell seven basis points to 2.64 percent, after reaching a high for the year of 2.77 percent on Monday. Much of the decline came after the release of the minutes from the Fed’s April meeting at which the subject of tapering its bond purchases was at least raised as a topic for future discussion. The Federal Open Markets Committee (FOMC) also continued to downplay the recent rise in measured consumer inflation as being attributable to temporary circumstances and pointed out that conditions remain far from the Fed’s dual objectives of full employment and inflation sustainably near 2.0 percent.

Investors Look for Clarity on Fiscal Policy and Tax Changes 

The week ahead could provide some clarity on the path forward for fiscal policy and the implications for the tax code. The White House has established Memorial Day weekend as a target for completing bipartisan negotiations on the President’s now $1.7 trillion infrastructure bill. Senate Republicans have countered with a $568 billion proposal of their own but have indicated a willingness to go as high as roughly $800 billion. 

The President wants to raise the corporate tax rate to pay for it, while the Republicans have said that is a non-starter, preferring user fees in various forms instead. It is clear that the two sides remain far apart. The President is being urged by progressive Democrats to abandon the negotiations and move ahead with one sizeable legislative package through reconciliation that includes the $1.8 trillion American Family Plan. Negotiations may extend well beyond the Memorial Day weekend, but at some point, the White House will have to decide how to proceed. The President has said the one unacceptable outcome is inaction. 

Supply Chain Issues Remain a Concern; Jobless Claims Decline for the Third Straight Week 

Two less than inspiring regional manufacturing activity reports from Philadelphia and New York last week were overshadowed by the stronger than expected flash PMI, despite persistent supply chain bottlenecks. The service sector report was even stronger, resulting in a new high for the composite index. Initial jobless claims declined for the third straight week, reaching a new recovery low of 444,000 or roughly half the rate witnessed at the start of the year. In contrast, continuing jobless claims edged slightly higher and have plateaued since the middle of March. 

This week’s economic calendar includes April durable goods orders and is expected to show continued strength. New home sales are expected to ease from the torrid increase in March, constrained by tight inventories and rising prices in a number of locations. Of particular interest will be the April PCE deflator, although the baseline effect from last year will mitigate the potential anxiety. The headline rate is forecast to rise to 3.5 percent from 2.3 percent in March, while the core rate is expected to 2.9 from 1.8 percent.

Important Disclosures:
Sources: Factset, Bloomberg. FactSet and Bloomberg are independent investment research companies that compile and provide financial data and analytics to firms and investment professionals such as Ameriprise Financial and its analysts. They are not affiliated with Ameriprise Financial, Inc.

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Investing involves risk including the risk of loss of principal.

The 10 Year Treasury Rate is the yield received for investing in a US government issued treasury security that has a maturity of 10 years.

The ISM manufacturing index, also known as the purchasing managers' index (PMI) is an estimate of manufacturing for a country, based on about 85% to 90% of total Purchasing Managers' Index (PMI) survey responses each month. It is considered to be a key indicator of the state of the U.S. economy.

The flash reading of PMI is an estimate of the Manufacturing Purchasing Managers' Index (PMI) for a country, based on about 85% to 90% of the total PMI survey responses each month. Its purpose is to provide an accurate advance indication of the final PMI data.

Personal consumption expenditures (PCE) measure consumer spending for a period of time.

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