The week was full of significant news releases, with new data on the Consumer Price Index (CPI), Producer Price Index (PPI), and a Federal Open Market Committee (FOMC) meeting. But was any of the news really anything new? Sure, the numbers changed from last month, but most of the trends remained the same.
On the CPI front, the annual pace of inflation eased last month to its lowest level in more than two years. CPI rose 4% from the same time the previous year, marking a significant decrease from April’s 4.9% annual increase while recording the slowest growth since March 2021. Moreover, this represents a drastic decline from its peak of 9.1% last June. In May, consumer prices slightly rose by 0.1% MoM, while excluding volatile items such as food and energy, the “core” CPI experienced a 0.4% increase, mirroring April’s rise. Year-over-year, core prices have increased by 5.3%. While inflation has been declining rapidly, the fact that core inflation remains elevated can be a cause for concern. However, as we’ve pointed out previously, much of the inflation continues to be driven by shelter (contributing 4.5% of the total 5.3%), which should begin to decline based on high-frequency data soon. Still, lingering price gains could pressure the Federal Reserve to consider additional interest rate increases.
And that is precisely what the Fed signaled on Wednesday coming out of their two-day meeting. The FOMC unanimously decided to hold off on another quarter-point rate hike, keeping the federal funds rate within the current target range of 5% to 5.25%. However, despite this being the first break in a rigorous monetary tightening campaign that commenced in March 2022, Federal Reserve Chair Jay Powell emphasized that the U.S. central bank intends to apply further constraints on the world’s largest economy to manage the ongoing issue of high inflation. Most policymakers anticipate two more quarter-point hikes this year, raising the benchmark rate to a range of 5.50% to 5.75%. This projection is based on the latest “dot plot” released on Wednesday, which compiles officials’ forecasts until the end of 2025. In addition, the updated projections included slightly higher inflation estimates for this year, more substantial economic growth, and lower unemployment. Combining the effects of the prior three factors is leading the hawkish rhetoric from the Fed.
Lastly, PPI data for May showed inflation decelerated to its lowest point since the end of 2020, providing a new indication of easing price pressures. The producer price index, closely monitored as a predictor of future inflation trends, dropped -0.3% from the previous month. Consequently, the annual rate fell to 1.1%, the lowest level since December 2020. When volatile food and energy prices are excluded, the “core” PPI saw a monthly rise of 0.2% and slowed to 2.8% on an annual basis. The decline in PPI continues the trend seen over the last few months, where PPI is considerably lower than CPI. And while this portends continued declines in CPI, it is not always a perfect leading indicator. Nevertheless, when combined with the high-frequency data adjustments to CPI, it clearly points in the right direction.
Economy
- U.S. equity markets moved substantially higher for the week ending June 16th, with the S&P 500 up +2.6%, the Nasdaq up +3.2%, and the small-cap Russell 2000 up +0.5%. It was a big news week with CPI, PPI, retail sales numbers and the Fed’s rate decision.
- In May, CPI in the United States fell to 4.0%, the lowest since March 2021 and slightly below market forecasts of 4.1%. A drop in energy prices primarily drove this decrease. The cost of energy plunged by 11.7%, compared to a decline of 5.1% in April, while food inflation decelerated to 6.7%, down from 7.7% in April.
- Core CPI in the United States, which excludes volatile items such as food and energy, dropped to a 1.5-year low of 5.3%, matching expectations. This was a decrease from the previous month’s rate of 5.5%. In May, core consumer prices increased by 0.4% from the preceding month, maintaining the same rate as in April and March, aligning with market predictions.
- The number of Americans filing for unemployment benefits stayed elevated at 262K for the week ending June 10th, significantly above market expectations of 249K. This is the highest figure since October 2021. The data aligns with other recent indicators suggesting a slight weakening in the U.S. labor market following a long period of rigid tightness. It appears U.S. businesses have begun to feel the effects of the Federal Reserve’s aggressive tightening campaign.
- U.S. retail sales unexpectedly climbed by 0.3% month-over-month in May, following a 0.4% rise in April, surpassing predictions of a 0.1% drop. This data indicates that consumer spending remains robust, despite the challenges of rising inflation and interest rates. The most substantial growth was observed in sales of building materials and garden equipment, which increased by 2.2%, and motor vehicles and parts, which saw a 1.4% increase.
Stocks
- U.S. equities were in positive territory. Technology and Materials were the top performers, while Energy and Financials lagged. Growth stocks led value stocks and large caps beat small caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 2 basis points to 3.76% during the week.
- U.S. bond markets were in positive territory this week while International bond markets were negative.
- Corporate bonds led for the week, followed by high yield bonds and government bonds.
