Weekly Market Update: June 19, 2023
Inflation showed signs of cooling last month. The Consumer Price Index (CPI) increased a modest 0.1% in May. On a 12-month basis, the CPI was up 4.0%, again matching expectations, but down notably from the 4.9% gain registered in April. This figure also marked the 11th- consecutive period of slowing price growth and was less than half the peak reading of 9.1% recorded in June of 2022. The core CPI, which excludes the food and energy components, was up 5.3%, suggesting inflation remains sticky in some areas of the economy, particularly the services sector.
The May Producer Price Index (PPI) also showed moderating price growth at the wholesale level. Specifically, the PPI declined 0.3%, after rising 0.2% in April. On a 12-month basis, producer prices rose 1.1%, which was down significantly from the prior-month reading of 2.3%.
The Federal Reserve was apt to pause on the interest-rate front at its mid-June Federal Open Market Committee (FOMC) meeting. (Note that this report went to press shortly before that decision.) The cooler-than-expected May prices likely gave the central bank an opportunity to examine how much of an impact the most restrictive monetary policy course in four decades has had on the economy. The resultant tighter credit market, which has reduced lending activity as banks turn more cautious, may well do some of the work for the Federal Reserve in its attempt to slow growth and tame inflation.
Sentiment is growing that the Fed will be able to orchestrate a soft landing for the economy. Although manufacturing and homebuilding activity remains weak, inflation is moving in the right direction, while job creation remains healthy. The consumer also has proven resilient. That said, the continued inversion of the Treasury market yield curve, the weakening leading economic indicators, and mostly lower oil prices still suggest at least a mild recession is plausible later this year.
Conclusion: The equity market rallied nicely in the first half of June, fueled by the moderating inflation data and the debt ceiling deal. Still, some roadblocks exist in the market’s attempt to sustain the rally, including slowing economic and corporate earnings growth and some uncertainty about the Fed’s course of action in the second half of this year.