Key Takeaways
1. Inflation Remains Elevated, But the Pace of Price Increases Eased Last Month
The April PCE price index, the Fed's preferred inflation measure, rose +3.8% year-over-year, the highest reading since May 2023, but the monthly increase of +0.4% was below the +0.5% forecast and slowed from March's +0.7%. Energy prices tied to the ongoing Strait of Hormuz oil disruption drove much of the headline figure. Core PCE, which excludes food and energy, rose just +0.2% for the month, below the +0.3% consensus, with the annual rate edging up from +3.2% to +3.3%.
Why it matters: The energy shock is still pushing the annual inflation rate higher, but the softer monthly core reading suggests it hasn’t yet spread broadly through the economy. Investors will be watching upcoming inflation data for signs that price pressures are widening beyond energy.
2. Economic Growth in Q1 Was Slower Than Initially Estimated
The second estimate of first-quarter GDP was revised down to a +1.6% annualized pace from the initial +2% reading. The growth downgrade landed the same morning as the hot inflation print, sharpening the contrast between cooling growth and sticky prices.
Why it matters: Growth rebounded in Q1 following the Q4 government shutdown, but the combination of slower growth and elevated inflation could raise concerns about stagflation. That environment would complicate the Fed's ability to respond, since cutting rates to support growth risks adding fuel to inflation.
3. Major Stock Indexes Continued to Set New Highs This Week
The Dow, S&P 500, and Nasdaq each reached new records, extending their rallies from late March. Gains were broad, with small-cap stocks and the equal weight S&P 500 also setting new highs.
Why it matters: Large technology stocks have driven most of the rally since late March, and breadth has been uneven at times. The recent participation from the Dow, small caps, and the average S&P 500 stock signals improving breadth.
4. Middle East Headlines Continue to Drive Oil Prices & Impact Market Sentiment
Iran reported a preliminary agreement to extend the ceasefire and guarantee shipping through the Strait of Hormuz, briefly sparking a risk-on rally, before U.S. officials disputed the document. Later in the week, renewed ceasefire headlines pushed stocks toward new all-time highs. Oil prices pulled back over the week, with crude trading near $90 and on track for a second consecutive weekly decline as markets priced in the possibility of an eventual deal.
Why it matters: The Strait of Hormuz remains the single biggest wildcard for energy prices and, by extension, inflation. A genuine resolution would provide a meaningful tailwind for both markets and consumers. However, as this week's back-and-forth illustrates, the headlines remain volatile and the outcome uncertain.
5. Interest Rates Reversed Lower as Oil Prices Declined
Treasury yields had climbed sharply in recent weeks, with the 30-year yield reaching a two-decade high as the oil price spike stoked inflation fears. That pressure eased this week as crude pulled back: the 10-year yield fell to around 4.45%, and the 30-year dropped below 5.00%. The move tracked the broader shift in Middle East sentiment, as reported progress toward reopening the Strait of Hormuz pulled oil lower and, with it, the inflation premium built into bond yields.
Why it matters: The recent path of interest rates has been closely tied to oil prices and the conflict in the Middle East. This week's reversal provided some relief across bonds, mortgages, and other rate-sensitive areas of the market. How long the relief lasts will likely depend on whether oil prices stay contained and diplomatic progress continues.
