Last Week on Wall Street

Last Week on Wall Street - May 18th, 2024

S&P 500: 1.54% DOW: 1.24% NASDAQ: 2.13% 10-YR Yield: 4.42%

What Happened?

This past week saw significant milestones in the stock market, with the Dow Jones Industrial Average closing above 40,000 for the first time, ending Friday at 40,003. The S&P 500 rose slightly to 5,303, while the Nasdaq Composite dropped to 16,685. This marked the fifth consecutive weekly gain for the Dow and the third for the S&P 500 and Nasdaq, driven by strong earnings from Walmart, Caterpillar, Chubb, and Valero Energy. Treasury yields fluctuated, with the 10-year note yield rising to 4.4% on Friday. This movement in yields, alongside cooling inflation data, influenced market sentiment and hopes for an economic "soft landing." The Consumer Price Index (CPI) report indicated that inflation is not reaccelerating, which supported a positive outlook in futures markets.

The Conference Board’s leading indicators index fell by 0.6% in April, signaling potential economic headwinds. Retail sales for April were flat, indicating cautious consumer spending amidst ongoing inflationary pressures and high interest rates. Despite this, the labor market remains resilient, although it showed signs of cooling with only 175,000 jobs added in April. Investors are now looking ahead to Nvidia's earnings report and other major retailers like Target, Lowe's, and Best Buy for further insights into consumer spending trends. Sector performances were mixed, with tech and real estate leading gains while consumer discretionary and industrials lagged. Overall, the markets remain cautiously optimistic amidst mixed economic signals and upcoming significant earnings and data releases.


CPI Report Shows Inflation Easing in April, Rises to 3.4%

  • The CPI report showed an increase of 0.3% from March, the Labor Department’s Bureau of Labor Statistics reported Wednesday.
  • Inflation eased slightly in April, providing some relief for consumers.
  • Core inflation was at 3.6%, the lowest reading ex-food and energy since April 2021.

The key takeaway - In April, the U.S. inflation rate showed a slight easing, with the consumer price index (CPI) rising by 0.3% from March, marginally below the anticipated 0.4%. On a year-over-year basis, the CPI increased by 3.4%, aligning with expectations. Core inflation, excluding food and energy, also rose by 0.3% monthly and 3.6% annually, marking the lowest annual core inflation since April 2021 and the smallest monthly increase since December. This data led to a positive reaction in financial markets, with major stock index futures rallying and Treasury yields falling. Futures traders increased the likelihood of a Federal Reserve rate cut by September, reflecting optimism that inflation might be cooling enough to prompt monetary easing.

However, the unchanged retail sales in April contrasted with inflation data, indicating consumer spending did not keep pace with price increases. This stagnation in retail sales, coupled with a modest 0.2% rise excluding autos, and declines in online and sporting goods sales, suggests consumers are feeling the pressure of higher prices and interest rates. The persistent inflation in shelter and energy costs continues to pose challenges for the Federal Reserve. The central bank's focus remains on achieving a sustainable path to their 2% inflation target before considering rate cuts, with recent statements from Fed Chair Jerome Powell indicating no immediate urgency to reduce rates. The mixed economic signals underscore the delicate balance the Fed must maintain in its policy decisions, impacting market expectations and the broader economic outlook.


ECD Projects Moderate Growth Amid Persistent Challenges

  • The OECD's latest Economic Outlook forecasts global GDP growth of 3.1% in 2024, improving slightly to 3.2% in 2025, despite challenges such as tighter monetary conditions and geopolitical tensions
  • Jobless claims totaled 231,000 for the week ending on May 4, marking the highest number of claims since August 26, 2023, and suggesting a notable increase in new layoffs.

The key takeaway - The Organization for Economic Co-operation and Development (OECD) recently released its latest Economic Outlook, forecasting global economic conditions for the upcoming years. Despite various challenges such as tighter monetary conditions and geopolitical tensions, global GDP growth is projected to remain resilient, with a 3.1% increase expected in 2024 and a slight improvement to 3.2% in 2025. This forecast reflects a balance between continued strong growth in the U.S. and emerging markets, and softer outcomes in several advanced economies, particularly in Europe. Inflation is also anticipated to ease, falling faster than initially projected, which has helped boost private sector confidence and real incomes as labor markets begin to stabilize.

However, the report highlights persistent challenges that could impact the global economy, including elevated inflation rates and high interest rates, which continue to strain household finances and business investments. This situation is expected to lead to a moderation in economic growth, with a projected GDP growth rate of under 1% for the U.S. in the latter half of 2024. These factors underscore the complex balance the Federal Reserve must navigate in its monetary policy decisions, as it aims to control inflation without stifling economic growth. The broader implications for markets include cautious optimism, as easing inflation may support future interest rate cuts, potentially beginning in September, which could bolster market sentiment and investment activities.


Leading Indicators Fall, Suggesting the Economy is Softening

  • The Conference Board’s leading indicators index fell 0.6% in April and has contracted by 1.9% over the past six months.
  • The Conference Board projects real GDP growth to slow to under 1% over the Q2 to Q3 2024 period due to elevated inflation, high interest rates, rising household debt, and depleted pandemic savings.

The key takeaway - The Conference Board's Leading Economic Index (LEI) fell by 0.6% in April, indicating that the U.S. economy may face weaker conditions in the coming months. This decline follows a 0.3% drop in March and brings the six-month contraction to 1.9%. This decrease is smaller than the 3.5% decline observed in the previous six months. Justyna Zabinska-La Monica from the Conference Board highlighted that the deterioration in consumer outlook, weaker new orders, negative yield spreads, and a drop in new building permits contributed to April's decline. Despite the decline, the LEI's six-month and annual growth rates do not signal an imminent recession but point to significant headwinds, such as elevated inflation, high interest rates, rising household debt, and depleted pandemic savings, that will likely weigh on the economy in 2024.

The LEI's drop suggests a slowdown in economic growth, with real GDP expected to grow below 1% in the second and third quarters of 2024. The GDP growth rate for the first quarter slowed to 1.6%, and the labor market also showed signs of cooling with 175,000 jobs added in April. The Federal Reserve is attempting to manage a "soft landing" by slowing the economy without causing a recession, and the Blue Chip Economists Survey for May estimates a 30% chance of a recession in the next 12 months. Markets have already begun to price in potential interest rate cuts, likely starting in September, which has contributed to recent stock market highs. However, concerns remain that the labor market may slow more than anticipated, and higher interest rates may persist longer than expected, causing consumers to become more cautious with their spending.


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