Weekly Market Update: June 17, 2024

There have been some positive developments on the consumer inflation front. Specifically, the Consumer Price Index (CPI) was unchanged in May, compared to a 0.3% rise in April. This marked the lowest reading since May of 2020. The core CPI, which excludes food and energy, rose 0.2%, down from the April pace of 0.3%. On a 12-month basis, the CPI and core CPI advanced 3.3% and 3.4%, respectively, again showing a modest slowdown in consumer price growth. Treasury yields, which had moved higher on the May jobs data (more below) and the European Central Bank’s decision to cut interest rates at its recent monetary policy meeting, fell sharply on the more-benign CPI data.

Meanwhile, the nation added an estimated 272,000 jobs in May. That figure was more than 100,000 above the revised prior-month figure and far exceeded the consensus forecast of 190,000. The Labor Department report also showed a modest uptick in the unemployment rate, from 3.9% to 4.0%, last month.

Inflation remains elevated in the labor market. Indeed, U.S. hourly wages increased 0.4% on a month-to-month basis in May, double the April pace and above Wall Street’s forecast of 0.3%. On a 12-month basis, hourly wages rose 4.1%, topping the consensus estimate of 3.9%. However, the Federal Reserve had to like the latest Job Openings and Labor Turnover Survey ( JOLTS) report, as it showed a sharp decline in job openings last month. This may put downward pressure on wages in the coming months.

The central bank’s “high for longer” interest-rate course is again being doubted by the stock market. The Federal Open Market Committee (FOMC), which was to make its June monetary policy decision shortly after we went to press, was expected to keep the federal funds rate at 5.25% to 5.50%. However, with the May CPI coming in weaker than expected, the Street is not ruling out an interest-rate cut, perhaps as early as the September FOMC meeting.

Conclusion: With second-quarter earnings season still weeks away, Wall Street’s attention will be on the U.S. economy and the Federal Reserve. The question for investors remains if and when the central bank will reverse monetary policy course. In this environment, a portfolio consisting mostly of high-quality stocks appears warranted. 

Source: ValueLine.com