Weekly Market Update – June 16, 2023

Quick Takes

• As expected, the Federal Reserve paused its rate hiking cycle after 10 consecutive hikes going back to January 2022. However, the latest projections put the federal funds rate at 5.6% which would imply one or two more hikes from the current 5% to 5.25% range.
• In addition to the Fed skipping a rate hike for the June meeting, other economic data came in better than expected. Inflation measures including the CPI, PPI, and import prices all decelerated more than expected and consumer sentiment, business optimism, and retail sales were all better than expected.
• As a result, investors sent the S&P and Nasdaq to their highest levels since April 2022, extending their win streaks to five and eight weeks respectively. Non-U.S. stocks also enjoyed healthy gains for the week. Like most of 2023, large growth stocks led the rally.

Fed pause helps stocks extend win streak, bonds gain too

Markets largely stuck to the script they’ve followed for most of the year with the largest capitalization companies outpacing small companies, and growth-oriented stocks, technology specifically, dominating value stocks. The S&P 500 index had its best week since March, up +2.7% for its fifth straight weekly gain. The technology-heavy Nasdaq Composite index also had its best week since March with a +3.3% advance, extending its win streak to eight consecutive weeks, which hasn’t happened since 2019. Both indices are at their highest levels since April 2022. Again, following the trends of much of the year, the small cap Russell 2000 index trailed, up a modest +0.5% for the week, enough to preserve its five-week win streak, but its smallest gain since May. Non-U.S. stocks also performed well as developed international stocks, as measured by the MSCI EAFE Index, were up +2.9% for the week while the MSCI Emerging Markets Index gained +2.8%.

The gains were helped by encouraging economic news – particularly with regard to inflation – but it was the decision by the Federal Open Market Committee (FOMC) to pause rate hikes that had investors celebrating. As anticipated, the FOMC opted to not hike rates in June, keeping it at the 5% to 5.25% range, the first time since January 2022, after 10 consecutive hikes, that the committee did not raise the target rate for federal funds. The FOMC’s latest projections put the fed funds rate at 5.6% by the end of 2023, up from 5.1% in March. Wednesday’s post-meeting statement suggested that further rate hikes could be in store if inflation does not show signs of slowing.

On that front, the week brought good news with both the Consumer Price Index (CPI) and Producer Price Index (PPI) showing the rate of inflation slowing. Friday brought more good news on the inflation front with Import Prices falling more than expected and the University of Michigan Survey of Consumers showing One-Year Consumer Inflation Expectations falling sharply to their lowest level since March 2021. In other economic data, the University of Michigan Consumer Sentiment gauge and the NFIB Small Business Optimism Index both rose more than expected, while Retail Sales surprised to the upside as well.

U.S. Treasury yields were mixed on the week with short-dated yields rising while long-dated yields fell. The 2-year U.S. Treasury yield was up +12 basis points (bps) to 4.71%, the benchmark 10-year U.S. Treasury yield was up +2 bps to 3.76%, and the 30-year U.S. Treasury yield fell -3 bps. The Bloomberg U.S. Aggregate Bond Index rose +0.2% over the week while non-U.S. bonds, measured by the Bloomberg Global Aggregate ex U.S. Bond Index, were up +0.5% for their third straight positive week.

Chart of the Week

The Consumer Price Index (CPI) inched up +0.1% in May, in line with expectations, but down considerably from the unrevised +0.4% increase in April. As seen in the blue line in the Chart of the Week below, year-over-year (YoY), consumer prices were up +4.0%, slightly below expectations for +4.1%, and well below April’s +4.9% rate. The annual headline inflation reading has eased from a peak of +9.1% in June 2022 and has now declined for 11 straight months. April was the first reading below +5.0% since April 2021, and now May sits at +4.0% threshold. However, Core CPI, which excludes the more volatile food and energy prices, continues to be more “sticky”, remaining at +0.4% for the third consecutive month, in line with expectations. Year-over-year, Core CPI (the yellow line in the chart below) slipped to +5.3%, a bit above expectations for +5.2% but below April’s +5.5%. That’s the slowest annual rate for Core CPI since December 2021. The shelter index was up +8.0% and accounted for over 60% of the YoY increase in Core CPI. The CPI for energy was down -3.6% for the month and -8.0% for the year. 0.6% in April after falling 3.5% in March. Within energy, the CPI for gasoline declined -6% YoY, making it the biggest contributor to the low headline inflation in May. Food prices were up +0.2% in May and +6.7% YoY. The bottom line for the latest read on consumer inflation is that it remains historically high, but importantly, is decelerating. However, Core CPI remains stubbornly high which may prompt the Fed to hike again in July.

Rate of Inflation is Slowing

Consumer Price Index (CPI), Year-over-Year Percentage Change

Source: Bureau of Labor Statistics, Briefing.com

Economic Review

• The Producer Price Index (PPI) declined -0.3% in May, under expectations for a -0.1% dip, and down from April’s unrevised +0.2% rise. A -1.6% drop in final demand goods drove the decline in the headline index, particularly due to a -6.8% fall in the index for final demand energy. Prices for final demand services increased +0.2% month-over-month. Year-over-year (YoY) PPI decelerated to +1.1% from +2.3% in April. That’s the lowest annual reading since December 2020. Core PPI, which strips out volatile food and energy costs, was up +0.2% for the month, matching expectations and April’s level. Year-over-year Core PPI also decelerated, dropping to +2.8, below expectations for +2.9% and down from +3.1% in the prior month (revised down from +3.2%). Like CPI, the key takeaway from the PPI is that wholesale inflation is slowing, although Core PPI remains above the Fed’s +2.0% target.
• May Import Prices fell -0.6%, slightly worse than expectations for -0.5%, and following the first monthly gain in 2023 with April’s +0.3% (revised down from +0.4%). Import Prices have now declined in nine of the previous eleven months. Year-over-year, import prices were down -5.9%. Imported fuel prices dropped -6.4% after rising in April for the first time since last June (+4.5%). Nonfuel import prices slipped -0.1% for the month, after being flat the prior month. On a year-ago basis, total import prices were down 5.9%, while nonfuel prices, which matter for consumer prices, dropped 1.6%.
• The National Federation of Independent Business (NFIB) Small Business Optimism Index for May inched up +0.4 points to 89.4, beating expectations for 88.5. Though this was a slight improvement from April, which was the lowest reading since 2013, the breadth of the components remains negative with five of the ten inputs of the headline optimism number moving lower while only four rose (“Now a Good Time to Expand” was flat). April marked the first time since January of 2022 that Inflation was no longer the topmost concern among respondents, but it returned to #1 in May, followed by Labor Quality which was the single biggest business problem in April. Small business owners that Expect the Economy to Improve over the next six months fell further in May to a net negative 50%, the worst of the survey. Expected Credit Conditions also slipped further to -10. “Overall, small business owners are expressing concerns for future business conditions,” said Bill Dunkelberg, NFIB Chief Economist.
• May Retail Sales were up +0.3%, beating expectations for a -0.2% decline, and down slightly from +0.4% in April. Retail sales are seasonally adjusted but not inflation adjusted. Retail sales ex-autos ticked up +0.1% for the month, in line with expectations and down from April’s unrevised +0.4% gain. Sales ex-autos and gas were up +0.4%, above expectations for +0.2%, and above April’s +0.5%, which was revised down from +0.6%. The Control Group, a figure used to calculate GDP, increased +0.2%, in line with expectations, and down from April’s +0.6% (revised down from the originally reported +0.7%). Year-over-year Retail Sales were up +1.6% from May 2022. Overall, spending was flat or up in May across nearly every retail category except gasoline stations (-2.6%) and miscellaneous store retailers (-1.0%), which shows the resilience of U.S. consumer spending.
• The preliminary June report of the University of Michigan Consumer Sentiment Index rose to a four-month high, rebounding to 63.9 from May’s 59.2, and well above expectations for an improvement to 60.0. Although it is up from its June record low, it remains below where it started the year and at recessionary levels. The Current Economic Conditions component improved to 68.0 from 64.9 in May. The Consumer Expectations component rose +5.9 points to 61.3. One-year inflation expectations fell sharply to +3.3% from +4.4%, which is the lowest level since March 2021. The five-year inflation expectations slipped to +3.0% from +3.1%. The year ahead inflation expectations decline may help keep the Fed in a less hawkish mood.
• May Industrial Production fell -0.2%, well below expectations for a +0.1% gain and following an unrevised +0.5% in April. Manufacturing output increased +0.1%, down from a negatively revised +0.9% gain in April (originally +1.0%). Capacity Utilization ticked down to 79.6% in May, a bit below expectations for 79.7%, and April’s positively revised 79.8% (originally 79.7%).
• The New York Fed’s Empire State Manufacturing Index, a gauge of manufacturing activity in the state, rebounded strongly in June to +6.6 from -31.8 in May, beating expectations for -15.1. Readings below zero indicate deteriorating conditions. The index had been in negative territory for five of the past six months. New Orders in the New York region rebounded 31.1 points to +3.1 in June. Shipments jumped 38.4 points to +22 in the region. The index for Future Business Conditions increased by 9.1 points to +18.9, suggesting firms have become more optimistic.
• Manufacturing in the Federal Reserve’s Third District fell in June with the Philly Fed Manufacturing Business Outlook Survey at -13.7, better than expectations of -14.0, but down from -10.4 in May. This was the tenth consecutive negative month. Any reading below zero indicates deteriorating conditions. New Orders fell to -11 in June from -8.9 the previous month. On the positive side, Shipments in Philadelphia rose to +9.9 from -4.7 in May. Additionally, the index of Future Activity jumped to +12.7 in June from -10.3 the prior month.
• The weekly MBA Mortgage Application Index jumped +7.2% for the week ended June 9, breaking four weeks of decline. The Purchase Index was up +7.6% following a -1.7% drop the prior week and the Refinance Index rose +6.0% following a -0.7% slip the prior week. The average 30-Year Mortgage Rate fell for the second week in a row, down -4 basis points to 6.77%, which is +1.12 percentage points higher than a year earlier.
• Weekly Initial Jobless Claims rose +28,000 to 262,000 for the week ended June 9, much higher than expectations for 245,000 and matching the prior week’s positively revised reading (originally 261,000). That’s the highest weekly level of new unemployment claims since October 2021. The number of people already collecting unemployment claims (i.e. Continuing Claims) rose +20,000 to 1,775,000 in the week ending June 2, up from the prior week’s 1,755,000, revised down from the originally reported 1,757,000.

The Week Ahead

With the market closed Monday in observation of Juneteenth, there was only one scheduled release, home builder sentiment. Housing data is heavy with Building Permits, Housing Starts, Existing Home Sales, and Weekly Mortgage Applications. Federal Reserve Chairman Jerome Powell will make appearances on Capitol Hill in front of the House Financial Services Committee and the Senate Banking Committee, supplementing the release of the Fed’s semi-annual monetary policy report.

Did You Know?

SAVING ON SUMMER TRIPS – The average price of a gallon of regular gasoline is $3.58, down from a record high of $5 a year ago when the Ukraine war upset energy markets and inflation flared globally. Decreasing oil demand and consumers’ timid post-pandemic return to the pumps have contained gas prices just as the busy summer driving season begins (Source: AAA, The Wall Street Journal).

CHINESE STOCKS SLOW – After a strong start this year, the rally in Chinese stocks fizzled out quickly. The CSI 300 Index, which tracks major stocks listed in Shanghai and Shenzhen, is up only +2.4% this year—underperforming most other major markets. And that is after two straight years of losses in 2021 and 2022 (Source: The Wall Street Journal)

PUT IT ON PLASTIC – Credit card debt has been piling up as Americans turn to plastic to counter their dwindling purchasing power. Consumers now owe a record $988 billion on their cards, up +17% from a year earlier. Credit debt took a break during the pandemic but is now back on the rise and nearing $1 trillion (Source: Federal Reserve Bank of New York, PIMCO).

This Week in History

BANKING BEHEMOTH IS BORN – On June 16, 1812, the State of New York chartered a new institution called City Bank of New York, capitalized at $2 million, with $800,000 already raised. Today, it is global behemoth Citigroup (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 than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. 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 U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. 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.