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Monthly Economic and Investment Outlook

May 2023 Economic and Investment Outlook

United States

stock market bull statue
  • The Fed’s preferred Inflation measure, the Personal-Consumption Expenditures (PCE) Price Index, essentially came in as expected in March. Annual headline inflation dropped from 5.1% to 4.2%, while the core rate, excluding food and energy, cooled from 4.7% to 4.6%.
  • The Employment Cost Index (ECI) showed labor costs remained stubbornly elevated in Q1 2023. The ECI captures wage inflation and changes in employee benefits. The ECI rose 1.2% quarter-over-quarter versus expectations for a 1.1% gain. On a positive note, the year-over-year rate declined from 5.1% to 4.8%.
  • According to the Labor Department, employers added 253k jobs in April, the best reading since January. April’s monthly payrolls increase was slightly below the prior six months average monthly gain of 290k, but consistent with a healthy labor market. The jobless rate fell to 3.4% last month, matching the lowest reading since 1969.
  • The historically low unemployment rate pressured wages, which increased 4.4% in April year-over-year compared to March’s annual increase of 4.3%. It is hard to have a recession with jobs continuing to expand at a solid pace and wages increasing at elevated levels.

    Unemployment Rates 

  • U.S. nominal GDP was 5.1% in Q1 2023, but with the GDP deflator at 4%, real (inflation-adjusted) GDP growth had a modest 1.1% annualized advance and was below consensus expectations and cooler than the 2.6% expansion in Q4 2022. Inventories knocked 2.3% percentage points off GDP growth in Q1, but consumer spending added 2.5%.
  • Economic activity in the manufacturing sector contracted for the 6th consecutive month in April, even though the ISM Manufacturing PMI rose from 46.3% to 47.1%. In the details of the report, prices paid rose 4 percentage points from 49.2% to 53.2%. Keep in mind, the Institute for Supply Management has said historically, a headline reading below 48.7% corresponds with a recession.
  • The ISM Services PMI rose from 51.2% to 51.9% in April. The services sector has expanded for the 4th consecutive month and 34 of the 35 previous months.
  • The Conference Board’s leading Economic Index (LEI) fell for the 12th straight month in March, and currently points to a recession.

    LEI continues to point to economic weakness 


  • The European Union’s statistics agency reported consumer prices in the Eurozone were 7.0% higher in April than a year earlier, an increase from 6.9% last month, and well below the October 2022 peak of 10.6%. However, the core rate of inflation edged lower to 5.6% from a high of 5.7% the previous month.
  • Consumer prices rose 10.1% in the United Kingdom (U.K.) from this time last year in March, following a 10.4% annual gain in February. This marked the 7th consecutive month with inflation above 10%.
  • The European Central Bank (ECB) slowed the pace of rate increases. The ECB recently voted for a 0.25% increase of its key policy rates (deposit facility, main refinancing, and marginal lending facilities) to 3.25%, 3.75%, and 4.00%, respectively, as the Eurozone’s economic prospects weaken. This follows three 0.50% hikes, a pair of 0.75% moves, and the inaugural 0.50% increase last July.
  • The ECB stated, “The Governing Councils future decisions will ensure that the policy rates will be brought to levels sufficiently restrictive to achieve a timely return of inflation to the 2% medium-term target and will be kept at those levels for as long as necessary.”
  • U.S. Dollar to the Euro

    Dollar to Euro 

  • China’s National Bureau of Statistics recently reported the Purchasing Managers Index for the nonmanufacturing sectors of the economy (services and construction) came in at 56.4% in April, a weaker reading than March’s 58.2% level, but still comfortably in expansion territory.
  • China’s Purchasing Managers Index for manufacturing fell unexpectedly into contraction territory, with a reading of 49.2% from the previous month’s level of 51.9%.
  • China’s Gross Domestic Product (GDP) increased 4.5% year-over-year in Q1 2023, led by strong consumer spending.
  • U.S. Dollar to the Chinese Yuan Renminbi

    Dollar to Yuan 

  • U.S. Dollar Index - a relative measure of the U.S. Dollar’s (USD) strength against a basket of six influential currencies, including the Euro, Pound, Yen, Canadian Dollar, Swedish Krona, and Swiss Franc.

    US Dollar Index 

Fixed Income

  • The Fed raised its key policy rate by 25 basis points, taking the Fed Funds Target Rate Range to 5.00-5.25%, a 16-year high, at the May FOMC meeting. This marked the Fed’s 10th consecutive rate increase since it began tightening in March 2022.
  • The post FOMC meeting statement removed the language that “some additional policy firming” may be warranted.
  • The Fed signaled that they will likely pause its rate hikes in June (next FOMC meeting is June 13-14). However, the FOMC remains highly attentive to inflation and is data dependent. If there is a pause, it may only be temporary.
  • The stress in the banking system will weigh on economic activity as banks tighten lending standards.

    federal funds rate futures 


  • The fixed income market is expecting rate cuts later in the year. However, we believe the most recent jobs data combined with elevated wage inflation will make it difficult for the Fed to cut rates this year.
  • Treasury Secretary Yellen has set the X date (deadline) for the US debt ceiling for June 1st, the date that Yellen believes the U.S. will need to raise the debt ceiling based on her comfort level with the Treasury’s cash cushion. But this does not mean the U.S. will default on June 1st if the debt ceiling is not raised on that date.

    treasury general account balance 

Tactical Fixed Income Allocation

  • Neutral duration to the fixed income strategy’s respective benchmark as fixed income markets price in slower economic growth, lower inflation, and the potential end to fed-funds rate hikes.
  • Slight overweight to short-term investment grade corporates - capture additional income with minimal incremental risk.

Equity Market

  • According to Strategas, the data from the past eight tightening cycles shows that from the last Fed rate hike to the first rate cut, the S&P 500 on average is up approximately 5% over the next 100 trading days, with the largest decline being roughly -10%. However, it is not the last rate hike that pressures the equity markets but rather the notion that monetary policy acts with a lag.

    Trading Days from Last Fed Rate Hike to First Cut

  • In a similar manner, S&P 500 performance from the first rate cut to the last rate cut shows that the probability of larger drawdowns increases. The cutting cycle on average lasts 278 trading days with an average decline of -3%. However, Strategas points out that that the current rate cycle closely matches the Fed’s action in 1974, 1980, and 1984 because of the quick rise in rates. In all three of those time periods, equity returns were positive.
  • An earlier-than-expected X-date for the debt ceiling means higher market volatility and an increased chance of a temporary short-term deal. Typically, the debt ceiling drama is short-lived and there’s not much of a lasting impact on most assets before or after a resolution.

    S&P 500 Index 

Tactical Equity Allocation

  • Overweight to U.S. Large Cap stocks with an emphasis on equities with quality, defensive, and strong cash flow characteristics.
  • Underweight to International Developed with no exposure to Emerging Markets. Although valuations remain attractive relative to U.S. equities, these asset classes may be pressured by slowing global growth and recessionary pressures.
  • Exposure to gold in an environment of high inflation, negative real interest rates, declining U.S. Dollar, and geopolitical tensions. CNBC noted in Q1 2023, central banks added 228 tons of gold to their global reserves, the highest level of purchases since the data series began in 2000.
Notices & Disclosures
Past performance is no guarantee of future results. Products and services offered through F.N.B. Investment Advisors, Inc. are not FDIC insured; and are not insured by any Federal Government Agency, are not deposits or obligations of or guaranteed by First National Bank of Pennsylvania or its affiliates and may go down in value. The material has been extracted from various sources that F.N.B. Investment Advisors, Inc. believes reliable, but we cannot guarantee the accuracy or integrity of the material. This material is for your private information, and we are not soliciting any action based upon it. Any projections, market outlooks or estimates contained herein are forward-looking statements and are based upon certain assumptions. Other events that were not considered may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice. To the extent that a reader has any questions regarding the applicability above to his/her individual situation of any specific issue discussed, he/she is encouraged to consult with their investment advisor. You can review your registered investment advisors or the investment advisory firm at the SEC's Investment Adviser Public Disclosure page -

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