Market Update – June 17th, 2024

Author:  Joe Maas, CIO SPG Advisors LLC

Monday, June 17th, 2024

Financial Markets

Last week featured several key market catalysts, including a Federal Reserve meeting, their Summary of Economic Projects, and the May CPI inflation report, which collectively sent the S&P 500 and Nasdaq Composite to new all-time highs. As of close on Friday, June 14th, the Nasdaq Composite gained +3.24%, the S&P 500 gained +1.58%, and the Dow Jones Industrial Average slipped -0.54% for the week. Alternatively, longer term bond yields fell last week, sending the Barclays Aggregate Bond Index up +1.35% in the week.

Market News
June Fed Meeting

Last week, the Federal Reserve held its fourth meeting of 2024 on Wednesday, June 12th, expectedly announcing that it would maintain the policy rate at 5.25 – 5.5%. A significant development from the meeting was the Fed’s revised rate projections, now anticipating only one rate cut by the end of the year, compared to the three rate cuts projected in their March meeting.

Throughout the press conference, Powell reiterated that they view the US economy as stable, however inflation has been more persistent than they previously thought in March, leading them to decrease their projections of rate cuts. In their Summary of Economic Projections (SEP), where FOMC participants outline their expectations for GDP growth, unemployment, and the policy rate, several changes to projections occurred, while some estimates remained the same.

Expectations for real GDP growth remained the same as the previous projection, with 2.1% growth projected for 2024 and 2% growth projected for 2025 and 2026. Unemployment projections remained stable at 4% for 2024 but were adjusted slightly upwards for 2025 to 4.2% and for 2026 to 4.1%.

Inflation expectations were also revised upwards, with PCE inflation now expected to be 2.6% by the end of 2024, compared to March’s projection of 2.4%. Similarly, the Fed now expects core PCE inflation to be 2.8% by the end of the year, up from March’s projection of 2.6%.

Most notably in the SEP, the Fed moved the Fed Funds rate projection for the end of 2024 from 4.6% to 5.1%, a significant change insinuating only one rate cut ahead this year. Markets responded positively to the news, with the S&P 500 rallying +0.85% on Wednesday.

Source: Federal Reserve

May CPI Below Expectations

Last Wednesday, the May CPI data was released ahead of the Federal Reserve meeting, coming in below expectations and showing significant improvements compared to prior months’ reports. May’s CPI posted at 3.3%, while core CPI came in at 3.4%, marking the lowest core CPI reading since April 2021. On a month-over-month basis, headline inflation remained flat, while core CPI increased by 0.2%.

By category, grocery costs were up 1% from a year ago, while restaurant costs rose by 4%, as food at home costs stabilize but food away from home continues to inflate at a faster pace. Energy costs increased by 4% year-over-year, and within the category, gasoline prices rose by 2.2% while electric prices rose 5.9% from May 2023.

New vehicle prices fell by -0.8% and used vehicle prices sank by -9.3% from a year ago, suggesting a mix of slower demand and improved supply in the automotive market. Shelter costs, the largest component of the CPI, rose by 5.4% from a year ago, continuing to exert upward pressure on overall inflation, however this has been slowly trending down in recent months. Transportation services experienced continually persistent inflation with prices 10.5% higher than a year ago, driven by higher auto insurance and repair costs.

Overall, May’s CPI report marked a month of improvement. However, the Federal Reserve remains uncertain about the progress, leading them to reduce their expectations of potential rate cuts in 2024.

Source: US Bureau of Labor Statistics

Producer Price Index

The May Producer Price Index also came in below estimates, similar to the CPI, following a few months of rising inflation. Producer prices were 2.2% higher than they were a year ago, while core producer prices, which exclude food, energy, and trade, were up 3.2% from a year ago. On a monthly basis, producer prices unexpectedly fell by- 0.2%, while core producer prices remained flat.

Goods prices fell by -0.8% in May, led by a -0.1% drop in food costs and a greater -4.8% drop in energy costs. Service prices were flat for the month, with transportation and warehousing costs falling by -1.4%, trade costs rising by 0.2%, and other service costs increasing by 0.1% month over month.

Overall, the PPI echoes a similar sentiment to the CPI, suggesting that inflation made downward progress in May. Despite this, economists and the Federal Reserve remain cautious, noting that this is only one month of better-than-expected data and inflation can often be unpredictable.

Source: US Bureau of Labor Statistics

Consumer Sentiment Falls

Another notable economic data point this week that diverged from expectations was the University of Michigan’s Consumer Sentiment Index. Consumer sentiment for June came in at 65.6, down from 69.1 in May and significantly lower than the 72 expected by economists. June’s index marks the lowest level in seven months. Much of the unexpected decline was attributed to a trend of consumers reporting declines in their personal finances due to modestly rising concerns over inflation as well as weakening incomes.

Year-ahead inflation expectations remained elevated, yet steady in June at 3.3%, surpassing the pre-pandemic norms of 2.3-3.0%. Longer-term inflation expectations edged up slightly from 3.0% in the previous month to 3.1% in June, indicating persistent concerns about future price increases.

This month’s weak sentiment data comes at a unique time when the Federal Reserve remains wary of an economy that it perceives as still too hot, while many consumers, particularly those in lower and middle-income groups, view the economy as increasingly bleak.

Source: The University of Michigan

Summary

Stocks notched new all-time highs last week on news of a lower-than-expected CPI and PPI inflation reports, where consumer inflation clocked in at 3.3%, and producer inflation clocked in at 2.2%. During its June meeting, the Federal Reserve revised its projections, now anticipating only one rate cut in 2024 and raising inflation expectations. Meanwhile, consumer sentiment has unexpectedly declined in recent months on concerns of sticky prices.

We appreciate your continued trust.

Thank you,

Joseph M. Maas,
CFA, CFP®, ChFC, CLU®, MSFS, CCIM, CVA, ABAR, CM&AA

The information contained herein is general in nature. It does not take into account your particular investment objectives, financial situation, or needs. It is provided for illustrative or informational purposes only, and should not be construed as advice. Our advisors can meet with you to discuss your retirement plan.