What Happened?
Stocks surged on Friday, ending a turbulent week on a high note as Wall Street digested new U.S. inflation data. Despite the volatility, the Dow outperformed with a 0.8% gain, while the S&P 500 and Nasdaq recorded consecutive weekly losses for the first time since April. The market’s rally was driven by oversold sentiment, a stronger-than-expected GDP report on Thursday, and optimism about potential Federal Reserve rate cuts due to economic resilience. CFRA Research’s Sam Stovall noted that the benign PCE report helped stabilize the market, encouraging a continued shift into cyclical stocks and small caps.
Investors moved towards cyclical sectors and small caps, with the Russell 2000 rising 1.67%. Industrials and materials stocks increased by about 1.7%, and 3M soared 23%, leading the industrial sector. Technology stocks also saw a late rally after a challenging week. June’s personal consumption expenditures price index, a key inflation measure, showed a 0.1% monthly increase and a 2.5% annual rise, matching expectations. This positive inflation data boosted investor hopes for rate cuts this year, with the Fed funds futures market pricing in reductions for September, November, and December.
Fed’s Key Inflation Gauge Rose 2.5% in June, in Line With Expectations
- The personal consumption expenditures price index increased 0.1% in June and was up 2.5% from a year ago, with the annual rate showing a slight decline from the prior month.
- Core inflation, which excludes food and energy, showed a monthly increase of 0.2% and 2.6% on the year, both also in line with expectations.
The key takeaway – In June, the Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, showed a slight easing of inflation, rising 0.1% month-over-month and 2.5% year-over-year, aligning with Dow Jones estimates. Core inflation, which excludes food and energy, rose 0.2% monthly and 2.6% annually. This data, coupled with modest increases in personal spending and income, supports expectations for a potential interest rate cut in September. Despite steady spending, the savings rate dropped to 3.4%, its lowest since November 2022. Stock futures reacted positively, while Treasury yields fell, reflecting market anticipation of a more aggressive Fed rate cut path.
US Economy Grew to 2.8% in the Second Quarter, Beating Expectations
- The U.S. economy grew at an annualized rate of 2.8% in the second quarter, surpassing the expected 2.1%, driven by robust consumer spending and business investment.
- Core PCE price index, a key inflation measure for the Federal Reserve, rose by 2.9%, down from 3.7% in Q1, while consumer spending increased by 2.3%.
The key takeaway – The U.S. economy grew at an annualized rate of 2.8% in the second quarter, driven by robust consumer spending, business investment, and significant inventory building. This exceeded economists’ expectations of 2.1%, highlighting the economy’s resilience despite global uncertainties. Consumer spending increased by 2.3%, fueled by services and goods, while business investments surged, particularly in nonresidential fixed investment and inventory accumulation. Government spending, especially in defense, also contributed positively to GDP growth. However, the trade deficit widened, subtracting from overall growth. Inflation pressures eased, with the core PCE price index rising at 2.9%, down from 3.7% in the first quarter, supporting expectations of a potential interest rate cut by the Federal Reserve in September. Despite solid economic performance, signs of consumer stress, such as rising credit card delinquencies and a declining personal savings rate, along with pressures in the housing market, indicate potential challenges ahead.
Existing Home Sales Slipped 5.4% in June; Median Sales Price Jumps to Record High
- Existing-home sales faded 5.4% in June to a seasonally adjusted annual rate of 3.89 million. Sales also slumped 5.4% from one year ago.
- The median existing-home sales price bounced 4.1% from June 2023 to $426,900 – the second straight month it reached an all-time high and the twelfth consecutive month of year-over-year price gains.
The key takeaway – In June, existing-home sales in the U.S. declined by 5.4% from May, reaching a seasonally adjusted annual rate of 3.89 million units, as reported by the National Association of Realtors. The median sales price hit a record high for the second consecutive month at $426,900, a 4.1% increase from the previous year. Sales dropped year-over-year in the Northeast, Midwest, and South, while remaining unchanged in the West. The total housing inventory rose to 1.32 million units, marking a 23.4% increase from a year ago, providing a 4.1-month supply at the current sales pace. This shift indicates a transition from a seller’s market to a more balanced or buyer’s market, with homes taking longer to sell and sellers receiving fewer offers.
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