Week in Review: May 24, 2024

May 29, 2024

Recap & Commentary

Markets ended the week flat to down as investors focused on earnings reports, economic data, and the release of the minutes from the Fed’s most recent meeting.

Prior to the Fed’s April/May meeting there was growing concern that should inflation continue to show signs of reaccelerating, as it did during 1Q24, the Fed’s next monetary policy action might to raise, not cut, rates. However, speaking at his post-meeting press conference, Chair Powell assuaged those concerns by stating he thought it “unlikely that the next policy rate move will be a hike.” Markets were no doubt disappointed then by the release of the minutes which indicated that “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.” While data dependency has been the Fed’s mantra for years, investors were no doubt disappointed to see an explicit discussion amongst Fed officials about the possibility of further rate hikes.

As markets are wont to do periodically, good economic data in the form of composite PMI data was treated as “bad” in terms of its potential impact on future rate cuts. Strong service sector data boosted the overall composite reading to its highest level in over two years. While the PMI data suggests that a recession is not of immediate concern, it also raises the specter that the Fed will ultimately be inclined to leave rates at current levels for longer than previously expected, something investors would rather they didn’t.

Economic Commentary

Composite headline purchasing managers’ index (PMI) rose to its highest level since April 2022, thanks to the service sector which saw business activity accelerate to its fastest pace in a year. Both the services and manufacturing sectors saw input and output prices rise, suggesting upward pressure on inflation persists, potentially clouding the future for potential Fed rate cuts.

Housing data continued to point to slowing conditions with both existing and new home sales falling from March to April.  Existing home sales fell 1.9% from both March, and a year ago. Supply, which has been a limiting factor for multiple years, jumped 9% from March and 16% from a year ago but remains at a modest 3.5 months, low by historical standards. The median price rose 5.7% from a year ago to $407.6K.  New home sales slid nearly 5% from March and 8% from a year ago. The median price rose 3.9% from a year ago to $433.5K. Unlike existing home supply, new home supply ended April at a robust 9.1 months, up from 8.5 months in March. Months of supply is calculated by dividing the current number of homes for sale by the current pace of sales.

Consumer sentiment fell in May, weighed down by declines in the assessment of both current and future economic conditions. Importantly for the Fed, inflation expectations remained well anchored as one-year inflation expectations rose just 0.1% to 3.3%, below the expected forecast of 3.5%, while five-year expectations remained unchanged at 3.0%. The Fed has stated that consumer inflation expectations play an important role in its monetary policy decisions.

Of Note

The US announced its second H5N1 bird flu case. Both cases have occurred in dairy workers presumed to have been exposed to infected cows. Thus far, scientists have not detected any human-to-human transmission.

Market Indices   (As of 05/24/2024)

The Week Ahead

• Core PCE Inflation
• Personal Income & Spending
• Pending Home Sales
• Consumer Confidence
• Revised 1Q24 GDP
• Weekly Jobless Claims