Before jumping into the mashup, we wish everyone a fantastic Memorial Day weekend. And while we find ourselves in the middle of a political battle on the debt ceiling, hopefully, this weekend can bring some perspective as we take a day to honor and celebrate the brave men and women who have given their lives for our freedom.
It’s Saturday night, and we find ourselves updating our weekly recap due to late-breaking news; President Biden and Speaker McCarthy have agreed in principle to increase the debt ceiling for two years, extending past the 2024 general election. This is unquestionably good news, and we would expect equity markets to respond positively when they open again on Tuesday. The details regarding concessions from both sides still need to be clarified, but it appears both Republicans and Democrats have retreated from their initial positions. We’ll continue to watch this closely, as even though a deal has been made in principle, it must still be passed through Congress. And given the apparent compromises on both sides, it is clear the bill will require bipartisan support, which is never a slam dunk (the Miami Heat are currently playing the Boston Celtics in game 6 of the Eastern Conference Finals).
Moving to the economic front, two pieces of news that came out Friday are likely to weigh on the decision-making process of the Federal Reserve at their June meeting. First, the Personal Consumption Expenditures price index showed that prices continue to rise, up +0.4% MoM, moving to +4.4% compared to last year. Strength in the services sector persists, keeping prices elevated, up +5.5% YoY. There was some good news, though, as food inflation continues to ease and energy prices are actually negative. With that said, if food and energy are improving and topline numbers are still increasing, it means the Fed’s preferred measure of Core PCE is rising even more quickly. And this is precisely what has happened. Core PCE rose to +4.7% versus last year, higher than expectations.
In addition to the PCE price index, personal spending and income numbers came in above expectations and last month’s report. Personal spending was up +0.8% MoM, while personal income was up +0.4% MoM. Both measures imply a more robust consumer, meaning a stronger economy and the potential for inflation to stick around longer. This counters what the Fed would look for in its battle to reign in actual and expected inflation, reinforcing bets that the Federal Reserve will commit to its hawkish stance and leave rates elevated for a prolonged period. Indeed, within the last week, futures markets have moved from pricing in a 17% chance of a rate increase in June to a 64% chance of a hike. Moreover, rate expectations for December have increased dramatically, now up +60 basis points from a month ago and in line with current rates, meaning no net reduction in rates.
Finally, we’ll leave you with a few interesting items we encountered this week:
- After surging 545% from April 2020 lows to May 2021 highs, lumber futures prices have collapsed 80% and are now 25% below pre-COVID prices in February 2020.
- In the New York Fed’s April survey of Consumer Expectations, a net 19% of respondents reported their financial situation was worse now than it was a year ago. While still negative, that’s up 18 percentage points from a low reading of -37% in June 2022.
- A whopping 82% of recent or potential home sellers said they feel “locked in” to their current home because of a low mortgage rate. Gen Z (97%), Millennials (87%), and Gen X (87%) homeowners feel universally “locked in,” but most Baby Boomers said they don’t feel “locked in,” likely because this older age cohort has built up the most equity in their homes over the years.
- The “greatest weekend in motorsports” is upon us, where Sunday marks the triple-header of prestigious races across multiple series: Monaco Grand Prix (Formula 1), Indianapolis 500 (IndyCar), and Coca-Cola 600 (NASCAR). If you’re so inclined, enjoy!
Economy
- U.S. equity markets were mixed for the week ending May 26, with the S&P 500 up +0.3%, the Nasdaq up +2.5%, and the Dow Jones Industrial Average down -1.0%. It was another light week for economic news, with ebbs & flows in the debt ceiling talks and a monster earnings release from Nvidia moving markets.
- The U.S. economy grew by an annualized 1.3% in Q1 2023, slightly higher than 1.1% in the advance estimate and market forecasts of 1.1%. Private inventory investment subtracted 2.1 points from GDP, somewhat less than the 2.3-point drag in the advance estimate. Also, despite stubbornly high inflation, consumer spending grew more than expected to 3.8% (vs. 3.7% in the advance estimate).
- The University of Michigan consumer sentiment for the U.S. was revised higher to 59.2 in May from an initial estimate of 57.7. Still, it remained at the lowest level in six months amid worries about the economy’s path. According to Surveys of Consumers Director Joanne Hsu, this decline mirrors the 2011 debt ceiling crisis, during which sentiment also plunged.
- The number of Americans filing for unemployment benefits rose to 229k in the week ending May 20th, slightly up from an over two-month low the week before but well below market expectations of 245k. The latest data suggests that the labor market in the United States remains relatively robust and constrained, which could result in upward pressure on wages and present an opportunity for the Federal Reserve to consider additional interest rate hikes as part of its measures to address inflation.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Consumer Staples and Materials lagged. Growth stocks led value stocks and large caps beat small caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 12 basis points to 3.80% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
