Week in Review: June 23, 2023

June 26, 2023

Recap & Commentary

Markets ended the holiday-shortened week lower as investors fretted about the prospects of additional rate hikes in the second half of the year. Just a week after the Fed chose to forgo a rate hike for the first time since March 2022, Fed Chair Jay Powell made it clear that additional hikes will be forthcoming.

Speaking before Congress as part of the Fed’s Semi-Annual Monetary Policy Report, Powell struck a hawkish tone noting that the Fed “never used the word ‘pause,’ and I wouldn’t use it here today.” Powell also noted that despite the improvements in inflation since last year, “inflation pressures continue to run high, and the process of getting inflation back down to 2% has a long way to go.”  In order to do so, there will need to be a period of “below trend” growth as well as some “softening” of labor market conditions, generally understood to mean a period of higher unemployment.

Reflecting the global nature of the fight against inflation, multiple European central banks raised rates over the course of the week, including the Bank of England (BOE), Swiss National Bank, and central bank of Norway. The BOE, in particular, surprised many investors, raising rates by 0.50%. Prior to the meeting markets had been pricing in a 60% change for a 0.25% hike.

Economic Commentary

Housing starts jumped 21.7% in May to 1.63M, the largest percentage gain since 2016. Measured in absolute terms, the 291,000-unit increase was the largest since 1990. By geography, nearly all areas contributed to the growth, with the exception of the Northeast. By type, single-family and multi-family starts contributed to the growth, rising 18% and 27%, respectively. Conversely, existing home sales remained tepid in May rising just 0.2% to 4.3M. Compared to a year ago, sales were down over 20%. The median price of an existing home came in at $396K, down 3% from a year ago. Despite slightly lower home prices, it’s unlikely existing home sales will improve much in the near term as many existing homeowners are unwilling to abandon their existing mortgage rates.

PMI data in June illustrated the continued divide between the manufacturing and service sectors. Manufacturing activity surprised to the downside, contracting at its fastest pace since December 2022, as new orders fell to a 6-month low. On the price front, cost pressures continued to fall as suppliers looked to increase sales by offering reduced prices to customers. Services activity grew for a 5th consecutive monthly albeit slightly slower than in May. Demand was strong in the sector as new orders increased during the month. Service sector input prices also increased during the month due to wages, even as input costs at factories showed continued declines. Confidence among manufacturers fell to a 6-month low, while service firms reported the highest level of sentiment since May 2022.

Of Note

Through Friday, the S&P 500 had gained 13.3% year to date. According to Barron’s, the returns have been driven by seven large tech companies- Apple, Amazon, Microsoft, Tesla, Nvidia, Meta (Facebook), and Alphabet (Google). Excluding those companies, the S&P 500 would be up only around 3%.

Market Indices   (As of 06/23)

• New Home Sales
• Pending Home Sales
• Core PCE Inflation
• Consumer Confidence
• Personal Consumption & Expenditures
• Durable Good Orders
• Weekly Jobless Claims