S&P 500: 2.35% DOW: 2.02% NASDAQ: 2.19% 10-YR: 3.82%
Last Week on WallStreet - July 1st, 2023
What Happened?
As we enter the Fourth of July weekend, we conclude the first half of 2023 with another remarkable week of gains driven primarily by economic data prints. Reflecting on the past six months, we have witnessed a significant surge in equities, attributed to better-than-expected economic data and optimism regarding the long-term productivity gains from artificial intelligence. However, it is important to note that this year's impressive performance has been driven by only a handful stocks, while the average company has largely been overlooked.
Turning the page, there are several questions on the minds of market participants that will surely shape our recollection of the second half of 2023. Will inflation continue to remain elevated, or will it buckle to the pressure exerted by the Federal Reserve? Can the economy sustain its robust growth in the face of high interest rates impacting demand? Will the stock market's rally extend to neglected sectors or experience a reversal? These questions are sure to bring volatility in the coming months as investors establish and correct their expected answers.
Key Fed Inflation Measure Shows Prices Rose Just 0.3% in May
- The PCE price index, a number closely watched by the Federal Reserve, rose 0.1% in May and 3.8% from a year ago
- Core PCE, which excludes food and energy prices, increased 0.3% for the month and 4.6% for the year
- Spending rose just 0.1% for the month, below the 0.2% estimate and a sharp drop from the 0.6% increase in April
- Spending decelerated despite a 0.4% increase in personal income
The key takeaway - Recent inflation data released from the Personal Consumption Expenditures (PCE) and Consumer Price Index (CPI) indexes show that inflation is moving in the right direction. However, the decline has decelerated meaningfully, and core inflation, a better indicator of readings as we advance, remains significantly elevated. Federal Reserve members continually reiterate that their work is not done, and this week's data supports their likely decision to raise interest rates in the upcoming months. The spending data in this report suggests that consumers might be starting to curb their expenditures in response to these pressures, which could aid in the battle against inflation.
US New Home Sales Jump in May; Median House Price Falls
- New home sales jumped 12.2% to a seasonally adjusted annual rate of 763,000 units last month, the highest level since February 2022
- New home sales posted double-digit growth in the Northeast, South and West. They rose 4.1% in the Midwest
- The median new house price in May was $416,300, a 7.6% drop from a year ago
The key takeaway - This month's data demonstrates a tremendous leap up for new home sales as supply of existing homes on the market continues to dry up. High interest rates are keeping current home owners in their houses and their low rate mortgages. Also shown in housing starts figures, home builders are jumping in to fill that supply gap and give prospective owners units to purchase. These data prints could be the early signals of a housing recovery if demand and supply return to the market.
Nick Timiraos - WSJ
Powell and Other Central Bankers Vow to Keep Fighting Inflation Until There is Evidence of Success
- “Although policy is restrictive, it may not be restrictive enough and it has not been restrictive for long enough,” said Fed Chair Jerome Powell
- Powell also noted that a strong majority of his colleagues expect two more rate hikes this year
- Christine Lagarde, head of the ECB, and Andrew Bailey, head of the Bank of England, joined Powell in saying there is more work to do in their inflation struggle
The key takeaway - Powell, Lagarde, and Bailey are facing similar struggles in their respective jurisdictions. Having already hiked tremendously, inflation remains stubbornly high despite having moderated from its peak last summer. All three central bankers reiterated their commitment to bringing inflation down and will need to see strong evidence of that before they start pumping the breaks. However, the economic picture has been "foggier" as of late with some indicators flashing recession warnings while others suggest impressive resiliency.
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