US Economy: Weekly Commentary – June 17, 2024.
US Market Review
U.S. bond yields fell, notably for long-term bonds; 2-year yield at 4.715%, 10-year at 4.228%. Inflation easing led to a 65% chance of a September rate cut. Nasdaq surged 3.77%, the dollar strengthened to 0.9349 USD/EUR. Oil rose 4.13% on low summer inventories. Gold gained amid Fed rate cut expectations and European uncertainties. Bitcoin rose 1.57% on bullish news.

U.S. bond yields declined, with a significant drop in long-term bonds. The two-year bond yield stands at 4.715%, while the 10-year bond yield has decreased to 4.228%. This decline indicates easing inflationary pressures. Following the release of the U.S. Producer Price Index (PPI) data, the likelihood of a rate cut in September has surged to 65%. Inflation data remains pivotal in determining the yield curve's trajectory.

Stock markets experienced a mixed week, with large-cap stocks outperforming small-cap stocks. The Nasdaq notably rallied by 3.77%, primarily driven by the continued strong performance of the Magnificent 7. Meanwhile, the dollar strengthened against the euro, with the USD/EUR exchange rate now at 0.9349.

WTI crude oil prices increased by 4.13%, driven by anticipations of reduced summer fuel inventories due to heightened demand. Gold prices also rose, propelled by inflation data and expectations of Federal Reserve rate cuts later in the year. Additionally, heightened risk aversion stemming from political uncertainties in Europe prompted a flight to safety, bolstering demand for gold. Meanwhile, Bitcoin recorded a gain of 1.57%, amid news suggesting that the leading cryptocurrency may soar.
US Market Views Synopsis
May's CPI moderated to 3.3% YoY, core CPI to 3.4%, and PPI fell. Markets rose, Fed maintained rates at 5.25-5.5%, with one cut expected in 2024. Consumer sentiment remained stable.

US Consumer Price Index (CPI) moderated to 3.3% YoY, and core CPI to 3.4%. The market responded positively, with both bond and equity markets rising. Key drivers of inflation included housing, healthcare, and auto insurance, while energy costs declined significantly. Producer Price Index (PPI) also undershot expectations, with headline PPI falling 0.2% MoM and core PPI remaining flat. The Federal Reserve maintained interest rates at 5.25-5.5%, revising projections to only one rate cut in 2024 and a total reduction of 100 basis points by 2025. Consumer sentiment in June remained stable, with a minor decrease from May, yet inflation expectations stayed above pre-pandemic levels. Year-ahead inflation expectations were steady at 3.3%, while long-term expectations slightly increased from 3.0% to 3.1%. Overall, we do not expect a significant change in consumer sentiment in the coming months, with a slight long-term rebound in inflation data anticipated.
Markets reacted positively as May's CPI data showed inflation moderating, with headline CPI at 3.3% YoY and core CPI at 3.4%. PPI also undershot expectations, increasing the likelihood of lower future inflation, and influencing potential Federal Reserve policy adjustments.

Positive market reactions were observed on Wednesday as both bond and equity markets rose following the latest US inflation data, which indicated favourable trends. The headline CPI for May moderated to 3.3% YoY, slightly below the expected 3.4%, while the core CPI decelerated to 3.4% from the anticipated 3.5%. The 0.2% MoM increase in the core CPI closely mirrors April's core PCE deflator, showing significant progress by the Federal Reserve in managing inflation. Notably, utilities have made their smallest contribution to inflation since September 2021, highlighting the pivotal role of energy in this decline, while categories such as auto insurance (nearly half of supercore inflation), healthcare, and housing remain prominent drivers of inflation, with housing alone accounting for two-thirds of the inflation figure. Excluding these categories, annual inflation stands at 1.1%. The supercore CPI declined due to lower energy costs.

Simultaneously, the PPI report indicated that producer prices significantly undershot expectations, with headline PPI falling 0.2% MoM rather than rising 0.1% as expected, and core PPI remaining flat instead of increasing by 0.3%. This trend enhances the likelihood of a second consecutive 0.2% MoM or lower core PCE deflator. Medical care, airline fares, portfolio management fees, and insurance contributed positively, suggesting a potential 0.1% MoM for the May core PCE deflator. While the Fed signalled that the most likely outcome was just one rate cut this year, Chair Powell acknowledged this is not a definitive plan and they can adjust to the data flow. Should we observe continued core inflation prints at or below 0.2% MoM, unemployment exceeding 4%, and further cooling of consumer spending, the Fed may gain confidence to transition monetary policy.

We anticipate a 25-basis-point rate reduction not occurring until December. The labour market remains robust, economic growth is strong, wage increases outpace inflation, and consumer spending exhibits resilience.
Interest Rates Decision
In the last meeting, Jerome Powell adopted a more hawkish stance, revising projections upward for inflation, unemployment, and anticipated rate cuts. Despite this adjustment, interest rates were maintained at their current level once again, with the outlook now forecasting only one rate cut in 2024.

The recent decision by the Federal Reserve to maintain interest rates within the 5.25-5.5% target range aligns with expectations but represents a significant shift in outlook. Initially forecasting three rate reductions for the year, the Fed now indicates only one, alongside an updated forecast projecting a total reduction of 100 basis points by 2025, up from the previously anticipated 75 basis points. This adjustment coincides with an upward revision of the 2024 core PCE projection to 2.8%, with a monthly increase expected at 0.175%. The long-term median point similarly indicates a move towards a more cautious stance, foreseeing a single rate cut for the year.

It is crucial to note, however, that these projections do not incorporate today's inflation data, which has shown better-than-expected performance. Consistent with the FOMC's stance, we expect only one rate cut this year, potentially occurring in December, considering the upcoming elections in November and the Fed's desire to avoid political implications.
Consumer Sentiment
Consumer sentiment in June remained stable with minor changes, maintaining higher inflation expectations compared to pre-pandemic levels.

Consumer sentiment remained relatively stable in June, with a minor decrease of 3.5 index points from May, a change within the margin of error. Current sentiment stands approximately 31% higher than the low experienced in June 2022 during heightened inflation concerns. There was a slight decline in personal finance assessments due to growing concerns over high prices and weakening incomes, although consumers have perceived minimal economic changes since May. Year-ahead inflation expectations remained steady at 3.3%, still above the pre-pandemic range of 2.3-3.0%. Long-run inflation expectations increased marginally from 3.0% to 3.1%, a change considered statistically insignificant, maintaining stability over the past three years but remaining higher than the pre-pandemic range of 2.2-2.6%.

We anticipate no significant change in consumer sentiment in the coming months and expect a slight long-term rebound in inflation data, in line with the survey.
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