June saw markets improve as the
inflation narrative shifted and trade policy zigged and zagged. Confronted with
such a challenging assortment of factors, the Federal Reserve is remaining
cautious. Read on for key highlights from last month.
Major U.S. Stock Indexes
U.S. stocks hit new highs last
month as the financial markets returned to a risk-on stance. Both the S&P
500 and Nasdaq 100 finished June in record territory.
- The S&P 500 rose 4.96%.
- The Nasdaq 100 increased 6.27%.
- The Dow Jones Industrial Average
climbed 4.32%.
Federal Reserve Stays the
Course
- Financial markets are betting
the •patient• faction led by Federal Reserve Chair Jerome Powell will
maintain its hold, with traders pricing in just a 23% chance
of a July rate cut.
- Powell told Congress last week
that •For the time being, we are well positioned to wait to learn more
about the likely course of the economy before considering any adjustments to
our policy stance.•
- What could accelerate rate cuts?
Deterioration in the economic outlook, particularly weakness in the labor
market. While the unemployment rate remains low at 4.2%,
leading indicators of job growth are pointing to a cooling labor market,
with continued jobless claims now at their highest level since November
2021.
Inflation and Tariffs
- Prices in the U.S. rose 2.3% in
May compared with a year ago, up from just 2.1% in April. Excluding the
volatile food and energy categories, core prices rose 2.7% from a year
earlier, an increase from 2.5% the previous month.
- Most people expect inflation to
rise soon due to tariffs, since the added costs will end up paid by
someone along the supply chain • whether it•s manufacturers, retailers, or
consumers • according
to Fed Chair Powell.
- Indeed, early indications show
the inflationary impact of tariffs: Walmart in May reported that its
customers will start to see higher prices in June and July with
back-to-school shopping, and Nike expects U.S. tariffs will cost the company $1 billion this year, saying it will
institute •surgical• price increases in the fall.
Are Consumers Tiring?
- Factors indicating consumer
fatigue include falling gas sales, declining auto purchases after a
tariff-fueled buying rush earlier in the year, and broader unease over the
economic outlook. Excluding autos, sales fell 0.3%,
though retail sales rose 0.4% without the most volatile categories.
- The University of Michigan•s
consumer sentiment index, released on June 27, rebounded from its near
two-year low in May, marking the first increase in six months. However,
the survey continued to reflect expectations of rising
inflation and an impending economic slowdown.
- The data follows the June 26
revisions to U.S. GDP estimates, which reduced first-quarter consumer
spending growth from a 1.2% increase to a mere 0.5%.
Job Pressures Impact Confidence
- The number of Americans
receiving ongoing unemployment benefits has risen to its highest level in
three and a half years, signaling a softening
labor market. Both current job availability and hiring conditions have
weakened.
- The Conference Board Consumer
Confidence Index fell
by 5.4 points in June to 93.0. The Present Situation Index •
based on consumers• assessment of current business and labor market
conditions • fell 6.4 points to 129.1. The Conference Board surveys focus
on the labor market and job security from the worker•s perspective.
- Despite consumers• declining
view about business conditions for the sixth straight month, with a less
favorable take on job availability, spirits for the labor market were
still moderately upbeat.
Looking Ahead
The market•s rebound from April
lows and recent global events is encouraging, but significant uncertainties
remain. Most notable is the potential impact of the Middle East conflict on oil
supplies from the Gulf, which holds half of global reserves and a third of
production.
Amid tariff uncertainties and
market volatility, it•s crucial to stay focused on your long-term goals.
Investing success comes from thoughtful strategy, as opposed to market timing.
Volatility is part of the process, and markets often • but not always • price
in future risks well before they materialize.