All Eyes on Friday’s PCE Inflation Report

Performance for Week Ending 6.21.2024:

The Dow Jones Industrial Average (Dow) added 1.45%, the Standard & Poor’s 500 Index (S&P 500) gained 0.61% and the Nasdaq Composite Index (NASDAQ) finished unchanged. Sector breadth was positive with 8 of the 11 S&P sector groups closing higher. The Consumer Discretionary sector (+2.50%) was the best performer while Utilities (-0.77%) was the weakest.

*See below for Index Definitions

MARKET OBSERVATIONS: 6/17/2024  – 6/21/2024

The S&P 500 finished higher for the third straight week and has now gained in eight of the past nine. On Thursday, the S&P crossed above the 5,500 level on an intraday basis for the first time ever, but a wave of late day selling knocked the broader market index back below the psychologically important level. During the week investors digested a batch of mixed economic data and a slew of Fed speak that generally confirmed that the Fed remains in wait and see mode. Despite the hawkish tone at the recent FOMC meeting, where officials reduced the projected number of rate cuts this year to just one from three, Traders continue to bet the Fed will reduce rates two times. According to the CME’s Fed Watch tool, investors are building in over a 65% probability of a 25-basis point cut at the September Fed meeting, followed by a second cut in December.

Fed Still in Wait and See Mode: A chorus of Fed officials last week underscored the need for more evidence of cooling inflation before lowering interest rates. Fed Governor Adriana Kugler said it will likely be appropriate for the central bank to cut rates “sometime later this year” if economic conditions unfold as she anticipates. St. Louis Fed President Alberto Musalem said in his first major policy speech that it could take “quarters” for the data to support a cut. Both New York’s John Williams and Richmond’s Thomas Barkin demurred from offering a specific time frame for the timing of a rate reduction but underscored the important role of economic data in the path of policy moving forward. Chicago Fed President Austan Goolsbee said policymakers will be able to cut interest rates if inflation continues to cool as it did last month. Goolsbee, speaking in an interview on Fox News, praised the recent report on May consumer prices, which showed a second straight month of decelerating inflation after a surprise pickup at the start of the year. Minneapolis Fed President Neel Kashkari said the central bank will return inflation to the Fed’s 2% target but estimated it will likely take a year or two to do so. “Getting all the way back to 2% is going to take a little bit more time, but I’m confident that we’re going to get there,” Kashkari said at an event. He emphasized the path for interest rates will be dependent on the economy, adding his desire for better communication of the central bank’s reaction function to incoming economic data. Kashkari described the fundamentals of the US economy as very sound and strong, and said he’s “hopeful that that’s going to continue.”

Economic Roundup – A Mixed Bag: US retail sales barely rose in May and prior months were revised lower, pointing to greater financial strain among consumers. The value of retail purchases, unadjusted for inflation, increased 0.1% after a downwardly revised 0.2% drop in April. The so-called control-group sales — which are used in the calculation of gross domestic product — climbed 0.4% in May, but were down 0.5% in April, which was the most in about a year. US industrial production increased in May, helped by a broad-based pickup in factory output in a positive sign for a manufacturing sector that has been struggling for momentum. The 0.9% increase in production at factories, mining and utilities followed no change a month earlier. US mortgage rates fell below 7% last week for the first time since March, spurring back-to-back increases in financing applications for home purchases. The contract rate on a 30-year fixed mortgage decreased 8 basis points to 6.94% in the week ended June 14, according to the Mortgage Bankers Association. The index of mortgage applications to buy a home increased 1.6% to the highest level since March after jumping 8.6% in the prior week. Initial applications for US unemployment benefits were little changed last week after a big jump in the prior period. Initial claims decreased by 5K to 238K in the week ended June 15. The four-week moving average, which helps smooth week-to-week fluctuations, rose to 232.8K, the highest level since September. New home construction in the US slumped in May to the slowest pace in four years, as higher-for-longer interest rates sap the housing industry’s momentum from earlier this year. Housing starts decreased 5.5% to a 1.28 million annualized rate last month. Building permits, which point to future construction, fell 3.8% to a 1.39 annual rate, also the weakest since June 2020.

The Week Ahead: Inflation will be the focal point this week with the Fed’s preferred inflation barometer—the core PCE—due out on Friday. According to Bloomberg, economists expected the core PCE to rise 0.1% during May, a modest slowdown from the 0.2% gain in April. On a year-over-year basis, core PCE is forecast to rise 2.7%, but down from the 2.8% pace in the prior period. Other notable economic releases include the Conference Board's consumer confidence gauge on Tuesday, new home sales on Wednesday and durable goods orders on Thursday. Earnings reports will begin to creep back into the picture with 8 members of the S&P 500 schedule to release results, including FedEx, Micron, and Nike. Seven Fed officials are scheduled to make appearances, including closely watched Fed Governor Chris Waller early Monday morning. Finally, in politics, the key event will be the US presidential debate between Trump and Biden on Thursday evening.

— By Michael Schwager, Chief Market Strategist, Managing Director

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.