Market Recap – Week Ending June 7

Stocks Higher; Fed Meeting, CPI Report This Week

Overview: Stocks across the globe were higher last week, led by a strong rebound in emerging markets (MSCI EM), up 2.4% on the week. In the U.S., the S&P 500 index recorded its 25th all-time high of the year, finishing higher by 1.4%. Bond yields fell with the taxable and municipal index returns returning 0.4% and 1.0%, respectively, for the week. The 2-year and 10-year Treasury notes ended the week lower at 4.87% and 4.43%, respectively, despite a backup in yields on Friday following a strong jobs report. Nonfarm payrolls far exceeded expectations for May with the economy creating 272,000 jobs, well ahead of the consensus for a 185,000 increase. The strong jobs number resulted in a 10-15 basis point increase in yields across the curve as markets now expect the first rate cut to come no earlier than the September Federal Reserve meeting. This week, investors will monitor the two-day Fed meeting June 11-12 for clues to future rate policy and the updated communication for the timing of any rate cuts and reduction of the balance sheet. Key economic data this week will come on Wednesday with the Consumer Price Index (CPI) report for May. Core CPI is expected to fall from 3.6% to 3.5% year-over-year as investors look for confirmation of a continuing trend in disinflation.

Update on Economic Growth (from JP Morgan): The U.S. is starting to see a cooling in growth data. The U.S. economic surprise index, which measures whether data came in above or below consensus, has been in negative territory since the start of May. Indeed, last week, May ISM manufacturing PMI was weaker than expected with new orders at the lowest level since June 2023. ADP private payrolls also were below consensus while April’s reading was revised down. Looking under the hood at the April PCE report showed real PCE falling 0.1%, versus a 0.4% increase in March. The Atlanta Fed’s GDPNow forecast for 2Q24 annualized quarterly GDP growth has fallen from 4.2% in early May to the latest estimate of 2.6%. Is slowing growth worrying? One might worry about the negative impact on earnings growth, but it also creates room for the Federal Reserve to cut interest rates, taking us closer to the soft-landing narrative. Given the soft pace and magnitude of the data weakness so far, the latter effect likely will outweigh concerns over earnings. Indeed, markets are pricing a 70% chance of a cut by September, up from 50% a week ago on May 30. We continue to expect 1-2 cuts to be delivered by the Fed in 2024, with the earliest possible being September.

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

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