by Alex Harding, CFA
Vice President
Equity Research and Portfolio Management
It was an action-packed week headlined by Wednesday’s economic “doubleheader.” The Federal Reserve’s June meeting took place the same day as the release of the Consumer Price Index (CPI) inflation report. The committee unanimously decided to leave rates unchanged but articulated a more hawkish stance than anticipated. While the FOMC statement updated its language to acknowledge the “modest” progress on recent inflation data, the most significant takeaways from the meeting came from the changes to their year-end projections. There was a widespread expectation that the Fed would reduce expected 2024 rate moves from three 25-basis point cuts to two. Instead, the median projection now only anticipates a single rate cut for 2024, leaving a year-end Fed funds target of 5.125%. In addition, the Fed’s preferred inflation gauge, core Personal Consumption Expenditures (PCE), was adjusted upwards from 2.6% to 2.8% despite the cooler-than-expected CPI report reviewed by the Fed during the meeting.
The May CPI report showed inflation was trending in an encouraging direction. Headline inflation was +3.3% compared to a year ago and flat compared to April’s reading, thanks to notable price declines in gasoline, auto insurance and airline tickets. Excluding the volatile components, such as food and energy, inflation hit its lowest month-over-month reading since 2021, translating to a 1.97% annualized pace. However, the housing component of CPI remained stubbornly high, which likely contributed to the Fed’s conservative stance despite its known lag to real-time housing indicators.
Fortunately, the stock market is forward-looking. The decline in inflation from 9% in June 2022 to approximately 3% has been one of the primary factors behind the bull market in stocks. The S&P 500, as shown in the chart below, is now 50% higher since inflation peaked, reflecting the market’s optimism and confidence.
Source: Refinitiv
Undoubtedly, the prospects of artificial intelligence (AI) and significant investments being made by companies into burgeoning technology have contributed to the market’s rally. Apple investors cheered this week as the company announced a collaboration with Microsoft-backed OpenAI, the maker of ChatGPT, at their annual developer conference. With over two billion Apple devices in use worldwide, the partnership gives OpenAI access to a far larger universe of potential users. For Apple products, ChatGPT will be integrated into a wholly overhauled Siri for the newest versions of iPhones. This move by Apple is believed to enable a new product “super cycle” as consumers swap old iPhones to access the latest technology. In response, shares of Apple stock soared this week, with Apple reclaiming the top spot from Microsoft as the most valuable company in the world on Thursday.
Looking ahead, the Fed will convene four more times this year. Given their conservative stance at this week’s meeting, it will likely need several more months of confirming data before they believe it is prudent to begin lowering interest rates. For now, the stock market is sending a clear message; it is confident that the Fed will navigate the situation and steer clear of a recession.
Takeaways for the Week:
The Fed left rates unchanged this week but adopted a more hawkish stance despite a cooler-than-expected inflation report
Core CPI hit its lowest month-over-month reading since 2021
The S&P 500 registered four new all-time highs this week and is now up approximately 14% in 2024