Monthly Market Update

All Clear on Inflation?

• Gross Domestic Product (2Q24): The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2024 is 5%on July 3, down from 1.7% on July 1.
• Employment (June): Total nonfarm payroll employment increased by 206,000 in June, and the unemployment rate changed little at 4.1%, the U.S. Bureau of Labor Statistics reported. The labor force participation rate changed little at 62.6% in June. Job gains occurred in government, health care, social assistance, and construction.
• Inflation (May): The Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, after rising 0.3% in April, the U.S. Bureau of Labor Statistics reported. Over the last 12 months, the all items index increased 3.3% before seasonal adjustment. The index for all items less food and energy rose 0.2% in May, after rising 0.3% the preceding month. The all items less food and energy index rose 3.4% over the last 12 months.
• The Producer Price Index (PPI) (May): The Producer Price Index for final demand declined 0.2% in May, seasonally adjusted. On an unadjusted basis, the index for final demand advanced 2.2% for the 12 months ended in May.
• Retail and Food Services Sales (May): Advance estimates of U.S. retail and food services sales for May 2024, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $703.1 billion, up 0.1% (±0.4%) from the previous month, and up 2.3% (±0.5%) above May 2023.
• Personal Income and PCE (May): Personal income increased $114.1 billion (0.5% at a monthly rate) in May, according to estimates released by the Bureau of Economic Analysis. From the preceding month, the PCE price indexfor May decreased less than 0.1%. Excluding food and energy, the PCE price index increased 0.1%. From the same month one year ago, the PCE price index for May increased 2.6%. Food prices increased 1.2% and energy prices increased 4.8%. Excluding food and energy, the PCE price index increased 2.6% from one year ago.

Fed Now Sees Only One Rate Cut This Year

The last FOMC meeting took place on June 12^th, 2024. The Committee decided to maintain the target range for the federal funds rate at 5.25% to 5.50% for the 7^th straight meeting. As of this writing, markets are pricing in at 91.2% chance of the Fed maintaining rates at the current level for the July 31^st, 2024 meeting. When looking at Fed funds futures, markets have dramatically reduced the number of expected rate cuts since the beginning of the year.

Highlights of Press Conference Transcript:

• Modest Progress Towards Inflation: “We’ve stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2%. So far this year, the data have not given us that greater confidence. The most recent inflation readings have been more favorable than earlier in the year, however, and there has been modest further progress toward our inflation objective. We will need to see more good data to bolster our confidence that inflation is moving sustainably toward 2%”.
• Risk of Reducing Policy Restraint Too Soon: “We know that reducing policy restraint too soon or too much could result in a reversal of the progress that we’ve seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
• Projected Fed Funds Rate is Revised Higher:” In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate, based on what each participant judges to be the most likely scenario going forward. If the economy evolves as expected, the median participant projects that the appropriate level of the federal funds rate will be 5.1% at the end of this year, 4.1% at the end of 2025, and 3.1% at the end of 2026”.
• Direction of Rates Continues to be Meeting by Meeting: “If the economy remains solid and inflation persists, we’re prepared to maintain the current target range for the federal funds rate as long as appropriate. If the labor market were to weaken unexpectedly or if inflation were to fall more quickly than anticipated, we’re prepared to respond. Policy is well positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate. We’ll continue to make our decisions meeting by meeting, based on the totality of the data and its implications for the outlook and the balance of risks”.

Monthly and YTD returns

Source: Morningstar asset class screening total return 1 month USD and total return YTD as of July 1st, 2024

Definitions:

Gross Domestic Product (GDP): A comprehensive measure of U.S. economic activity. GDP is the value of the goods and services produced in the United States. The growth rate of GDP is the most popular indicator of the nation’s overall economic health. Source: Bureau of Economic Analysis (BEA).

• • GDPNow is not an official forecast of the Atlanta Fed. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDPNow—the estimate is based solely on the mathematical results of the model. In particular, it does not capture the impact of COVID-19 and social mobility beyond their impact on GDP source data and relevant economic reports that have already been released. It does not anticipate their impact on forthcoming economic reports beyond the standard internal dynamics of the model.
  • The Current Employment Statistics (CES) program produces detailed industry estimates of nonfarm employment, hours, and earnings of workers on payrolls. CES National Estimates produces data for the nation, and CES State and Metro Area produces estimates for all 50 States, the District of Columbia, Puerto Rico, the Virgin Islands, and about 450 metropolitan areas and divisions. Each month, CES surveys approximately 142,000 businesses and government agencies, representing approximately 689,000 individual worksites. Source: Bureau of Labor Statistics (BLS).
  • Initial Claims: An initial claim is a claim filed by an unemployed individual after a separation from an employer. The claimant requests a determination of basic eligibility for the UI program. When an initial claim is filed with a state, certain programmatic activities take place and these result in activity counts including the count of initial claims. The count of U.S. initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country. However, these are weekly administrative data which are difficult to seasonally adjust, making the series subject to some volatility. Source: US Department of Labor (DOL).
  • The Consumer Price Index (CPI):Is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. Indexes are available for the U.S. and various geographic areas. Average price data for select utility, automotive fuel, and food items are also available. Source: Bureau of Labor Statistics (BLS).
  • The national unemployment rate: Perhaps the most widely known labor market indicator, this statistic reflects the number of unemployed people as a percentage of the labor force. Source: Bureau of Labor Statistics (BLS).
  • The number of people in the labor force. This measure is the sum of the employed and the unemployed. In other words, the labor force level is the number of people who are either working or actively seeking work. Source: Bureau of Labor Statistics (BLS).
  • Advance Monthly Sales for Retail and Food Services: Estimated monthly sales for retail and food services, adjusted and unadjusted for seasonal variations. Source: United States Census Bureau.
  • Federal Open Market Committee (FOMC): Responsible for implementing Open market Operations (OMOs)–the purchase and sale of securities in the open market by a central bank—which are a key tool used by the US Federal Reserve in the implementation of monetary policy. Source: Federal Reserve.
  • The Federal Funds Rate: Is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. Source: Federal Reserve Bank of St. Louis.
  • The “core” PCE price index: Is defined as personal consumption expenditures (PCE) prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation trends. Source: Bureau of Economic Analysis (BEA).

  Sources: U.S. Bureau of Economic Analysis (BEA), Bureau of Labor Statistics (BLS), U.S. Department of Labor (DOL), Federal Reserve, Federal Reserve Economic Database (FRED), Federal Reserve Bank of Atlanta, U.S. Census Bureau, Department of Housing and Human Development (HUD), U.S. Department of Agriculture, U.S. Energy Information Administration (EIA), U..S Department of the Treasury, Office of the United States Trade Representative (USTR), U.S. Department of Commerce, data.gov, investor.gov, usa.gov, congress.gov, whitehouse.gov, U.S. Securities and Exchange Commission (SEC), Morningstar, The International Monetary Funds (IMF), The World Bank (WB), European Central bank (ECB), Bank of Japan (BOJ), European Parliament, Eurostats, Organization for Economic Co-operation and Development (OECD), National Bureau of Statistics of the People’s Republic of China, Organization of the Petroleum Exporting Countries (OPEC), World health organization (WHO).

  Financial Markets – Monthly and YTD returns (Table): Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (JPM EMBI Global), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond), and Developed Markets Sovereign (excl. US) (JPM GBI Global Ex US). Source: Morningstar.

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