Market Recap – Week Ending June 14

Market Updates

Stocks Continue Rally After Positive CPI Report

Overview: U.S. stocks continued their rally last week with the S&P 500 index now trading higher for seven of the last eight weeks. The S&P 500 finished the week up 1.6% as consumer prices (CPI) recorded their slowest increase since August 2021, with both headline and core CPI coming in below consensus expectations. Headline CPI rose 3.3% year-over-year in May, down from 3.4% the month prior. With progress on disinflation continuing, investors have been encouraged the Federal Reserve may cut rates sooner than previously thought. Interest rates declined last week on that prospect with the 2-year and 10-year Treasury yields falling to 4.69% and 4.21%, respectively. Both taxable and municipal bonds were higher by around one percent on the week, and the broad-based bond indices now are close to unchanged in total return for the year. Meanwhile, as expected, the Fed left rates unchanged at the current level of 5.25 – 5.50% at its June policy meeting last week. The committee stated there has been “modest progress towards the 2% inflation objective”, and revised projections for rate cuts in 2024 to 25 basis points (bp) of cuts, less than the March projections of 75 bp. According to FedWatch data, markets now are pricing in about a 65% probability of a first rate cut at the September meeting, with 1-2 cuts expected by the end of the year. This week will be a holiday-shortened week, with markets closed Wednesday for the Juneteenth holiday. Key consumer spending data is due out Tuesday, with May retail sales expected to increase 0.3% for the month. Investors also will look to housing starts and existing home sales for additional clues to the health of the economy.

Update on Inflation in Europe (from JP Morgan): The European Central Bank (ECB) began hiking rates in August 2022, five months after the Fed. Since then, both central banks have largely raised rates in tandem. Last week, however, the ECB diverged from its usual alignment with the Fed and cut rates by 25bps to 3.75%. Despite a slight upside surprise in May’s preliminary inflation data, inflation in Europe has stabilized since February, remaining relatively flat and below levels in the U.S. This move by the ECB has sparked questions about the Federal Reserve’s timeline. After last week’s ECB cut, markets are pricing in 58bps of cuts in the eurozone and 39bps of cuts in the U.S. by the end of the year. In the very short run, the Fed seems determined not to ease until it is more confident about cutting inflation to 2%, and this week’s cut from the ECB is very unlikely to prompt a cut from the Fed. On the other hand, if the ECB cuts again in September, the Fed may feel more pressure to cut to prevent an unwanted rise in the exchange rate. While an even stronger dollar could further dampen inflation, it could also further worsen our yawning trade gap and hurt companies that derive a significant share of their revenues from overseas. Investors should also remain aware of how a strong dollar could impact the value of overseas investments. However, the Fed is also aware of these risks, suggesting the Fed may not be too far behind the ECB if inflation continues to fall on both sides of the Atlantic.

WeeklyReturns6-17-24

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s , Bloomberg, Factset, CNBC

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