Weekly Market Update – June 14, 2024

Quick Takes

• The theme for the week was easing inflation, as several inflation reports came in below Wall Street expectations. Consumer prices, wholesale prices, and import prices were all lower than expected. At the same time, however, Fed policy makers indicated a hawkish outlook.
• The benign inflation data sent U.S. Treasury yields sharply lower for the week. With bond yields falling, bond prices were rising, and the Bloomberg U.S. Aggregate Bond Index finished the week with a +1.1% gain. 
• The S&P 500 Index and Nasdaq Composite were trading at all-time highs most of the week and finished with gains of +1.6% and +3.2%, respectively. Small cap and value stocks weren’t as fortunate, with both styles finishing lower for the week.

Inflations slows, bond yields sink, and large growth soars

The S&P 500 Index fell -2.1 points (-0.04%) on Friday to just miss its fifth straight record high close. For the week, the S&P 500 gained +1.6%, its best week in over a month. Soft inflation data was one of the catalysts lifting stocks during the week. On Wednesday mornings, the headline Consumer Price Index (CPI) came in unchanged for the month of May, which was its first flat month since July 2022. Markets cheered the unexpectedly low inflation reading, but some of the gains for the day were taken back in the afternoon when the Federal Reserve released its latest monetary policy decision. Though the Fed left rates unchanged, as expected, the so-called dot plot, which is the summary of economic projections for the Fed’s voting committee members, only indicated a single quarter-point interest rate cut in 2024. That’s down from three cuts in the previous dot plot from March, which the market didn’t like. 

Further souring the market’s mood on Wednesday afternoon were hawkish comments from Fed Chairman Jerome Powell at the post-Fed-release press conference. Powell didn’t say much to dissuade the more restrictive dot plot and failed to provide any specific guidance on the direction of the Fed’s policy. 

Fortunately, further soft inflation data continued as the week went on, which took the sting away from the hawkish dot plot and Powell press conference. On Thursday, the Producer Price Index (PPI), which measures inflation at the wholesale level, also came in lower than expected. Then, on Friday morning, Import Prices continued the evidence of easing inflation as they fell sharply in May—by the most since the end of last year. By the end of the week, Fed fund futures were back to pricing in two quarter-point cuts by the end of the year.

The tech-heavy Nasdaq Composite Index enjoyed the tailwind from the low inflation data, as well as continued enthusiasm for artificial intelligence, which helped propel it to five straight record closes and a +3.2% return for the week. Growth stocks beat Value stocks by 4.6 percentage points (according to Russell Index data), which was the largest weekly margin since March 2023. Like value stocks, small cap stocks also didn’t fare very well for the week as the Russell 2000 Index slid -1.0%. 

Overseas, stocks struggled with political uncertainty. European markets began the week with the news that French President Emmanuel Macron called for snap legislative elections later in June after European Union elections showed a broad shift toward right-wing and far-right parties. In addition, European Central Bank President Christine Lagarde said that restrictive monetary policy in Europe wasn’t over and not to expect any further rate cuts any time soon. As a result, developed market international stocks (as measured by the MSCI EAFE Index) sank -2.6% for the week, while the MSCI Emerging Markets Index managed to stay barely positive with a +0.4% return. 

In the bond world, investors cheered the lower inflation and pushed the yield on the benchmark 10-year U.S. Treasury yield sharply lower for the week, from 4.43% to 4.22% (bond prices and yields move in opposite directions.) The shorter 2-year U.S. Treasury yield was down -18 basis points on the week to finish at 4.70%. The Bloomberg U.S. Aggregate Bond Index finished the week with a +1.3% gain, but the Bloomberg Global Aggregate ex U.S. Bond Index (non-U.S. bonds) slipped -0.05% for the week.  

Chart of the Week

The rate of inflation for consumer goods and services was unchanged in May from April, according to the headline Consumer Price Index (CPI), which came at +0.0%. That is the first time it has been flat for the month in almost two years and was below expectations for a +0.1% reading and last month’s unrevised 0.3% rate. Year-over-year (YoY) CPI grew at a 3.3% rate, also below expectations for a +3.4% annual rate, which is where it was the prior month. Core CPI, which excludes the more volatile food and energy prices, was up +0.2% for the month, coming in under expectations for +0.3%, which is where it was the prior month. That is the smallest monthly increase in seven months. YoY Core CPI was +3.4%, also less than the expected +3.5%, down from the prior month’s unrevised +3.6% annual rate and was the smallest annual rise since April 2021. The Federal Reserve and Wall Street generally considers the core rate as a better predictor of future inflation. Though both the headline and core measures are well off their 2022 peak levels, they still remain higher than the Fed’s +2% target, with the annual rate of CPI stuck above 3% since March 2021. Details of the report show Shelter and Food costs drove the increases, while Energy fell for the month, down -2.0% (but up +3.7% YoY). Shelter, which makes up about one-third of the weighting in the CPI, was +0.4% higher for a fourth straight month and up +5.4% from a year ago. The overall takeaway of the report is that the slowdown in the rate of inflation for the month was a positive surprise but is still only a modest step towards the Fed’s 2% inflation target. As such, the market will like the report, but the Fed will likely want to see another month or two of this slowing trend to settle on a September rate cut.

Inflation for Consumer Goods and Services Flattens in May

Consumer Price Index (CPI), month-over-month % change

Note: Seasonally Adjusted
Source: Bureau of Labor Statistics via FRED, CNBC

Economic Review

• Like consumer inflation, wholesale inflation slowed more than expected in May. The headline Producer Price Index (PPI) fell -0.2%, below expectations for a +0.1% increase and far below the prior month’s unrevised +0.5% rate. The year-over-year (YoY) PPI ticked up +2.2%, down from +2.3% (revised up from +2.2%) and below expectations for +2.5%. Core PPI, which strips out volatile food and energy costs, was flat for the first time in more than a year and well below the expected +0.3% rise. That was down sharply from the prior month’s unrevised +0.5%. YoY Core PPI was up +2.3%, below expectations for +2.5%, which is where it was the prior month (revised up from +2.4%). A drop in Gas prices was largely responsible for the relief to wholesale prices, but food prices also declined.
• Imports Prices fell -0.4% in May, the largest monthly decline since the end of last year, following four consecutive months of rises. The decline was more than the expected -0.1% and a sharp decline from April’s unrevised +0.9% spike, which was the largest increase in two years. The decrease was largely due to lower Gas prices. Year-over-year (YoY) import prices were up +1.1%, the same as the prior month, and below expectations for a +1.3% annual rate. Export Prices plunged -0.6%, far below expectations for a +0.1% rise and way down from the prior month’s +0.6% rise (revised up from +0.5%). Export prices were up +0.9% over the past year, in line with expectations and up from the -1.9% annual drop the prior month (revised up from the originally reported -1.0% decline). A strong U.S. dollar has made it cheaper for Americans to buy foreign goods and to travel overseas.
• The National Federation of Independent Business (NFIB) reported that their Small Business Optimism Index rose to 90.5 in May from an unrevised 89.7, where it was expected to stay. The bounce was broad-based, with the five of the ten components improving, two flat, and three falling. The biggest improvement in the components was firms Expecting the Economy to Improve, which rose +7 points to -30%. Firms with Plans to Increase Employment rose +3 points to a net 15%. A net 42% of businesses reported Current Job Openings they are Unable to Fill, an increase of +2 points. Firms Expecting Credit Conditions to Improve rose +2 points to -7%. Despite the rise in Expectations for Economy to Improve, a net -30% of firms Expect Positive Earnings Trends, down -3 points for the month, and firms Expecting Sales Growth fell -1 point to -13%. Firms viewing Current Inventories as Too Low fell the most, -4 points, to -8%. A total of 578 employers were surveyed for the NFIB report. “The small business sector is responsible for the production of over 40% of GDP and employment, a crucial portion of the economy,” said NFIB Chief Economist Bill Dunkelberg. “But for 29 consecutive months, small business owners have expressed historically low optimism, and their views about future business conditions are at the worst levels seen in 50 years. Small business owners need relief as inflation has not eased much on Main Street.”
• The preliminary reading of the June University of Michigan Consumer Sentiment Index fell to a 7-month low of 65.6, down from 69.1 in the final reading from the prior month. That was far short of expectations for 72.02. The Current Economic Conditions component was 62.5, down from last month’s 69.1 and far below the expected 72.2. The Consumer Expectations component fell to 67.6 from 68.8, missing expectations for 72.0. One-year inflation expectations were flat at +3.3%, above expectations to come in at +3.2%. The five-year inflation expectations came in at +3.1%, a tick above last month’s +3.0%, where it was expected to stay.  
• The Treasury Department reported that the U.S. Federal Budget Deficit expanded by $347 billion in May from the $240.3 billion shortfall in the same month a year ago, and more than the $276.5 billion shortfall expected. That brought the year-to-date shortfall to $1.2 trillion, slightly lower than for the first eight months of fiscal year 2023. Federal Tax Receipts were up just +5% from last year to $323.7 billion, while Government Outlays were up +22% from a year ago to $670.8 billion. Year-to-date outlays for interest paid on public debt reached $728 billion, a 37% increase over last year. 
• Weekly MBA Mortgage Applications jumped +15.6% the week ended June 7, the biggest weekly jump since early 2023. That followed two straight weeks of more than -5% drops each. The Purchase Index was up +8.6% following a -4.4% decrease the prior week. The Refinance Index surged +28.4% following a -6.8% drop and a -13.6% plunge the prior two weeks. The average 30-Year Mortgage Rate slipped up to 7.02% from 7.07% the week before. According to the Mortgage Banker Association, the 30-year fixed-rate mortgage has now been above 7% since the end of March.
• Weekly Initial Jobless Claims jumped +13,000 to 242,000 for the week ended June 8, above expectations for 225,000. The prior week was revised up to 229,000 from 219,0000. The number of people already collecting unemployment claims (i.e., Continuing Claims) rose to 1,820,000 in the week ended June 1, above consensus estimates for 1,795,000. Last week’s reading of 1,792,000 was revised down to 1,790,000.

The Week Ahead

It’s a holiday-shortened week, with markets closed for Juneteenth on Wednesday. It is not a terribly busy calendar and is housing-centric, with weekly mortgage applications and homebuilder confidence on Wednesday when markets are closed, building permits and housing starts on Thursday, and existing home sales on Friday. Finally, don’t be surprised to see some volatility on Friday with “triple witching,” in which stock options, stock index futures, and stock index options all expire on the same day. Other reports include retail sales, industrial production, the Leading Economic Index, S&P Global Manufacturing and Services Purchasing Managers’ Indexes, and regional Fed surveys from New York and Philadelphia. 

Beyond the usual economic reports, on Thursday, both the Bank of England (BOE) and the Swiss National Bank (SNB) will announce monetary-policy decisions. The BoE isn’t expected to change rates, while the SNB is expected to cut rates a second time by a quarter-point (they had a first quarter point reduction in March).  

Did You Know?

OPENINGS ARE CLOSING – After peaking above 12 million in March 2022, the number of job openings in the U.S. has fallen -33.9% to just over 8 million. Openings are now just 6% above the pre-COVID all-time high in November 2018 (Sources: US Bureau of Labor Statistics, MFS).

TRI TRILLION CLUB – On June 5th, three stocks in the S&P 500 ended the day with market caps of more than $3 trillion (Microsoft, Apple, and NVIDIA). The $9.2 trillion combined market cap of these three stocks is roughly the same as the combined market cap of the smallest 350 stocks in the index (Source: Bespoke Investment Group, MFS).

SODA WARS – In 2023, Dr. Pepper eclipsed Pepsi to become the second-most popular US soda brand behind Coke. When including Sprite and Diet Coke, these top five soda brands make up roughly 52% of total soda market share. (Sources: CNN, Beverage Digest, MFS).

This Week in History

MAFIA MARKET – On June 14, 2000, the U.S. Justice Department alleged members of the country’s five biggest organized-crime families conspired to manipulate securities. Prosecutors said the bull run and tech mania had made stock manipulation the white-collar crime of choice (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.