After eight weeks of decline, the Dow Jones Index bounced back sharply with a 6.2% gain last week, while the S&P 500 and Nasdaq climbed 6.5% and 6.8%, respectively. Stocks rallied on strong retail earnings and a slowing U.S. inflation report. Looking forward to this week, the market will be watching oil prices as the EU reached a deal to ban most of Russian crude imports and China as Shanghai is set to ease its strict Covid lockdown policies.
Euro area inflation came in higher than expected at 8.1% last week and is likely to remain high with further sanctions on Russian oil and gas exports. The European Central Bank will join the Fed in tightening monetary policy and may soon lift interest rates above zero. In the U.S., President Biden will hold a meeting with Treasury Secretary Yellen, and Fed Chair Powell to discuss action items to combat inflation. The President is expected to show support for the Fed, while proposing measures to boost productive capacity and reduce the Federal deficit.
Corporate earnings announcements have continued to send mixed signals to investors. A week after disappointing earnings announcements from retail-giants Target and Walmart, retail stocks broadly rallied back this past week on encouraging reports from a handful of companies like Dollar Tree, Ulta Beauty, and Ross Stores. The takeaways across these retail earnings results are that demand from U.S. consumers remains resilient to support top-line sales, but rising freight, labor, and input costs are weighing on bottom line earnings. Additionally, spending is quickly shifting away from durable goods towards services like travel and related goods (like luggage and vacation-apparel for example).
Meanwhile, social media company Snapchat warned investors that the macro environment is worse than anticipated only one month after reporting earnings. It is now unlikely that it will hit its conservative revenue and profit guidance. After the news, Meta Platforms, Google, Pinterest, and other digital advertising stocks fell. While digital advertisement spend is likely to remain prevalent in years to come, too much was pulled forward during the pandemic while customers were stuck at home with stimulus checks to spend on goods. Couple the pull-forward in spend with recession concerns, and the outlook for digital advertisers looks challenged for the remainder of 2022.
In Ukraine, Russia has extended its control over the eastern city of Severodonetsk. Severodonetsk is key to the war because of Russia’s goal of controlling Donbas to give it a firmer grip on the roads leading to Slovyansk and Kramatorsk. In hopes of retaking Severodonetsk, the Biden administration plans to provide Ukraine with precision-guided rockets that can hit targets from 40 miles away.
