Week in Review: June 16, 2023

June 20, 2023

Recap & Commentary

Market ended the week higher, following the US Federal Reserve’s decision to pause its rate hikes for the first time since the current rate hike cycle began in March 2022. Speaking after the Fed’s meeting, Fed Chair Jay Powell explained the rationale for the pause before indicating further hikes are likely. “We have raised our policy interest rate by 5%…and the full effects of our tightening have yet to be felt. In light of how far we have come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening, today we decided to leave our policy interest rate unchanged…Looking ahead, nearly all Committee participants view it as likely that some further rate increases will be appropriate this year…”

Updated projections released after the meeting show the Fed Funds rate ending 2023 at 5.6%, consistent with two additional 0.25%. Powell indicated that the next increase will likely be at the July meeting which he indicated will be “live”, which in Fed parlance means the Fed may well take action.

Reflecting a growing divergence in global monetary policy, the European Central bank pressed forwards with an additional rate hike to combat inflation, while the Bank of Japan left rates unchanged, and China’s central bank lowered a key policy rate in an effort to support the country’s flagging economy.

Economic Commentary

Headline consumer inflation (CPI) rose 0.1% in May and 4.0% from a year ago. Core CPI (excluding food and energy) increased 0.4% for the month and 5.3% from May 2022. May’s report marked the 11th consecutive month of slowing in the annual pace of headline inflation, since it peaked at 9.1% in June 2022. Despite the steady progress Fed Chair Powell made it clear that further improvements in core inflation must occur before the Fed considers cutting rates. Referencing recent core personal consumption expenditures (PCE) readings, the Fed’s preferred inflation measure, Powell stated that, “you’re just not seeing a lot of progress.” For those investors still holding out hope for a rate cut in 2022, Powell all but quashed that notion saying it would be inappropriate to cut rates until inflation is “coming down really significantly” which isn’t like for “a couple of years.”

Headline producer inflation (PPI) fell 0.3% from April to May, the third decline in the past four months, which helped slow the annual pace of PPPI to 1.1%, the smallest year-over-year increase since December 2020. The monthly decline was due to a 1.6% drop in goods prices, the largest decline since last July.

Retail sales surprised to the upside, rising 0.3% on stronger purchases of automobiles and building materials. The strength in spending was accompanied by improved consumer sentiment as the short- and long-term economic outlook benefited from easing inflation and a resolution to the debt ceiling crisis.  The monthly reading of 63.9 was the highest in four months, but still low by historical standards as near-term income expectations have softened.

Of Note

According to the UN, the number of countries with a fertility rate below 2.1, considered the breakeven rate for maintaining a population’s size, increased from 98 in 2010, to 124 in 2021

Market Indices   (As of 06/16)

• Housing Starts
• Existing Home Sales
• US Manufacturing PMI
• US Services PMI
• Weekly Jobless Claims