Economic Outlook - July 2024
- Recent economic data indicates that inflation is steadily falling. May core CPI came in cooler than expected (+0.3% for the month and 3.5% annualized), the softest increase since August 2021, while the core Producer Price Index (PPI) and import prices were also below consensus. The Personal Consumption Expenditures Price Index (PCE) report (the Fed’s preferred measure of inflation) also showed inflation slowing. The 12-month core reading was 2.6%, down from 2.8% in April.
- The June Federal Open Market Committee (FOMC) meeting ended with no change to the benchmark rate of 5.25%-5.50%, a level maintained since July 2023. The updated Summary of Economic Projections showed a median forecast of just one rate cut this year. The calmer inflation readings have led bond traders to bet on faster interest rate cuts by the Fed than officials have projected, pressuring fixed income yields lower.
- The economic backdrop has been softening. Retail sales increased just 0.1% in May vs. April, indicating a slowdown in consumer spending. The Conference Board’s consumer confidence survey weakened in June, due to a negative short-term outlook for income, business, and labor market conditions. The housing market appears to be in the doldrums. Homebuilder sentiment fell to a six-month low, and housing starts in May declined 5.5%. Single-family building permits declined for a fourth straight month.
- U.S. manufacturing activity and Euro zone manufacturing both moderated last month. The Institute for Supply Management reported that its purchasing managers’ index (PMI) of manufacturing activity slipped to 48.5 in June from 48.7 in May. In the Euro zone, demand fell at a much faster pace than expected, with the PMI falling to 45.8 in June from May’s 47.3 despite factories cutting their prices. The Atlanta Fed’s GDPNow estimate for real GDP growth in Q2 slipped to 1.7% after the ISM report was released.
- Notwithstanding indications of a cooling economy, the S&P 500 notched 31 record closes in the first half of the year. Hype about artificial intelligence lifted shares of graphics chip maker Nvidia and other large-cap tech stocks to new highs. Nvidia’s market value soared above $3 trillion in June, less than four months after it reached the $2 trillion mark. The cohort of Nvidia, Alphabet, Microsoft, Meta Platforms and Amazon has accounted for well over half of the S&P 500 Index’s return this year.
- Election uncertainty around the world is likely to cause greater volatility in the markets as we enter the back half of the year. French president Emmanuel Macron shocked markets earlier this month by calling for a snap legislative election after his party’s defeat in European parliamentary elections. His gamble could result in a win for the country’s far right party, causing significant political upheaval. In India, Prime Minister Narendra Modi’s party won a much smaller majority than expected, causing Indian share prices to go on a rollercoaster in the aftermath. In Latin America, Mexican voters elected the first leftist president in the country’s modern history. The Mexican peso has fallen by almost 10% since the landslide victory, due to concerns about fiscal policy in Mexico and increased interference in the economy.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, S&P Global Market Intelligence, U.S. Dept. of Commerce, Federal Reserve Bank of Cleveland, NAHB
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