The conflict with Iran and elevated oil prices continue to dominate market sentiment. The U.S. proposed a memorandum of understanding which would lead to the gradual reopening of the Strait of Hormuz and lifting of the American blockade on Iranian ports. The plan includes provisions for the removal of sanctions on Iran and a moratorium on the country’s uranium enrichment program. The fragile ceasefire was tested by Iran with missile launches against the United Arab Emirates this week followed by U.S. strikes on Iranian missile and drone launch sites. The U.S. blockade remains in place with some ships moving through the Strait of Hormuz. West Texas Intermediate, the U.S. benchmark, fell to about $94/barrel as of this morning, and Brent, the global oil benchmark, dropped to $100/barrel from $115, on optimism for an agreement to end the conflict.
Economic releases this week reflected a resilient U.S. labor market. April Nonfarm Payrolls exceeded market expectations with a gain of 115,000 jobs. March payrolls were revised higher to 185,000, while February was revised lower by 23,000. The advance in hiring was led by healthcare, which has been the primary driver of job growth over the last year. The unemployment rate held steady at 4.3%. The March Job Openings and Labor Turnover Survey (JOLTs) also beat expectations with 6.87 million job openings. The labor market remains relatively balanced with approximately 0.95 open jobs per unemployed person. Jobless Claims remained muted with initial claims of 200K for the May 2nd week and continuing claims dropping to 1,766K in the April 25th week.
The April Institute for Supply Management Services Index slipped to 53.6 from 54.0, with new orders pulling back sharply to 53.5 and the prices paid component holding at 70.7, its highest level since October 2022. The May preliminary University of Michigan Sentiment index fell to 48.2 from 49.8 last month. Current conditions dipped sharply, reflecting the impact of spiking oil and gasoline prices on the consumer’s wallet. However, future expectations remained buoyant, and inflation expectations remained anchored, with one-year expectations edging down to 4.5% and longer-term expectations ticking down slightly to 3.4%.
Housing was also in focus this week. New home sales rebounded in February and March from a dismal January. Sales rose 8.9% in February and 7.4% in March as mortgage rates briefly dipped to the 6% range before the recent uptick to 6.37%, according to Freddie Mac. Building permits fell 11.4% in March as economic uncertainty and higher rates dampened builder sentiment.
Interest rates moved modestly lower this week, with 2-year Treasuries trading at approximately 3.88%, 5-Year at 4.01%, and 10-year at 4.36% at the time of writing. Stocks rose this week, with the S&P 500 around 7,395, as investors focus on strong earnings and shrug off the risk. However, it is important to note that oil shocks typically have a lag effect.
We continue to expect the federal funds rate to remain on hold at 3.50% to 3.75% through our six-month forecast horizon. Portfolios remain positioned with an emphasis on safety, liquidity, and disciplined credit risk management.
Next Week: Existing Home Sales, NFIB Small Business Optimism, ADP Weekly Employment Change, Consumer Price Index, Federal Budget Balance, MBA Mortgage Applications, Producer Price Index, Import Price Index, Jobless Claims, Export Price Index, Retail Sales, Business Inventories, Industrial Production, Empire Manufacturing, Capacity Utilization