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Weekly Update 06/28/2024: Fed’s Preferred Inflation Gauge Cools

  • General Mills releases earnings beating profit expectations and announces a dividend increase
  • RTX Corp wins $265 million US Air Force contract
  • United Parcel Service sells its freight business Coyote Logistics for $1.03 billion
  • CACI International wins $2 billion NASA contract

There was plenty of important news to digest this week – enjoy the reading!

Domestic Economic News

The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year. The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month. That marked the smallest advance in six months. On an unrounded basis, it was up just 0.08%, the least since November 2020. From a year ago, it rose 2.6%, the least since early 2021, according to Bureau of Economic Analysis data out Friday. Inflation-adjusted consumer spending posted a solid advance after a pullback in April, driven by goods and fueled in part by a jump in incomes. Stock futures remained higher while Treasury yields fell. The report offers welcome news for Fed officials seeking to commence with rate cuts in the coming months, though policymakers will likely want to see additional reports like this one first. They recently dialed back their projection for rate cuts this year following worse-than-expected inflation data in the first quarter. Central bankers pay close attention to services inflation excluding housing and energy, which tends to be more sticky. That metric increased 0.1% in May from the prior month, according to the BEA, the least since October. Household demand has so far remained resilient even as borrowing costs have taken a toll on some sectors of the economy. The report showed inflation-adjusted outlays for services rose 0.1%, driven by airfares and health care. Spending on merchandise advanced 0.6%, led by computer software and vehicles. Despite some signs of cooling in the labor market, solid wage growth continues to power consumer spending. Wages and salaries rose 0.7%. On an inflation-adjusted basis, real disposable income jumped 0.5%, the most since January 2023, after a flat reading in April. The saving rate rose to 3.9%, the highest level since the start of the year. A monthly government report on employment, due July 5, will offer the latest insight on how income growth is holding up.

US consumer confidence eased this month on a more muted outlook for business conditions, the job market and incomes. The Conference Board’s gauge of sentiment decreased to 100.4 from a downwardly revised 101.3 reading in May, data out Tuesday showed. The median estimate in a Bloomberg survey of economists called for a reading of 100. June’s measure of expectations for the next six months fell nearly 2 points to 73, while present conditions increased from a downwardly revised May reading. Confidence has been subdued over the past few months as consumers contend with a higher cost of living, elevated borrowing costs and, more recently, a softening in the labor market. Only 12.5% of consumers expect business conditions to improve in the next six months, the smallest share since 2011. “Confidence pulled back in June but remained within the same narrow range that’s held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future,” Dana Peterson, chief economist at the Conference Board, said in a statement. “However, if material weaknesses in the labor market appear, confidence could weaken as the year progresses.” Concern about prices eased this month, though consumers still noted elevated prices for groceries. Inflation data for the month of May showed a broad pullback in price increases for US consumers. Consumers also pared buying plans for motor vehicles and major appliances, which are often financed. However, more respondents indicated they intend to take a vacation in the second half of the year, reflecting a pickup in domestic travel plans. Consumers’ view of the current labor market improved slightly. Some 38.1% of consumers said jobs were “plentiful,” up from 37% in May, while fewer said jobs were “hard to get.” The difference between these two — a metric closely followed by economists to gauge labor-market strength — rose for the first time since the start of the year. The share of respondents who think the November election will impact the economy was relatively low compared with June 2016 but slightly higher than in 2020, the survey showed.

New-home sales in the US slumped in May as elevated prices and still-high mortgage rates kept would-be buyers at bay. New single-family home sales decreased 11.3% to a 619,000 annual pace last month, the slowest since November, government data released Wednesday show. Economists surveyed by Bloomberg had a median estimate of 633,000. The sales pace is now at the low end of the range seen over the past year, suggesting limited momentum amid a lack of affordability. Mortgage rates dipped below 7% in mid-June for first time since late March, but they remain more than double their levels from the end of 2021. While high prices have scared off many buyers, a surge of inventory is helping affordability at the margin. The median sale price of a new home decreased 0.9% from a year ago to $417,400 in May. At the same time, the supply of available homes increased to 481,000, still the highest since 2008. Big builders including Lennar Corp. and KB Home are trying to combat the affordability challenge by buying down customers’ mortgage rates or offering price breaks, and so far the strategy has kept the builders’ order books full. Both companies reported profit gains in their recently completed second quarters. Recent data indicate overall housing demand is improving this month. The Mortgage Bankers Association’s index of home-purchase applications rose for the last three weeks to the highest level since early February. Over the long term, the US still has a shortage of new homes, Lennar Chairman Stuart Miller said last week on an earnings call, citing “over a decade of underproduction.” Meantime, the supply of previously owned homes remains well below pre-pandemic levels, hampered by high borrowing costs that have discouraged sellers from listing their properties.

An index of US pending existing-home sales unexpectedly fell in May to the lowest level on record as elevated mortgage rates and high prices discouraged prospective buyers. A gauge of contract signings from the National Association of Realtors decreased 2.1% to 70.8 last month, the lowest reading in data going back to 2001, the group said Thursday. The median estimate of economists surveyed by Bloomberg called for a 0.5% gain. “The market is at an interesting point with rising inventory and lower demand,” NAR Chief Economist Lawrence Yun said in a statement. “Supply and demand movements suggest easing home price appreciation in upcoming months. Inevitably, more inventory in a job-creating economy will lead to greater home buying, especially when mortgage rates descend.” Closings on previously owned homes have been stuck near an annualized 4 million for more than a year, partly because of the so-called lock-in effect, whereby sellers are unwilling to list their homes and part with their current low mortgage rates. Potential homebuyers are turned off by high selling prices, which hit a record $419,300 in May, although the market is gradually seeing a pickup in listings. On a call with reporters last week, Yun noted optimistically that the supply of existing homes was up more than 18% from a year ago. “Let’s wait to see if this leads to more home sales,” he said.

Mortgage rates in the US slipped for a fourth straight week. The average for a 30-year, fixed loan was 6.86%, the lowest level in about three months, Freddie Mac said in a statement Thursday. Last week, the average was 6.87%. Despite the slight relief from the pullback in borrowing costs over the past month, rates are still hovering near 7%. Investors are closely watching the Federal Reserve to gauge the path of potential rate cuts later this year. Earlier this week, Fed Governor Michelle Bowman warned that there’s some upside risks to inflation and rates may need to remain elevated for some time. “By historical standards, the economy is in good shape, and we expect rates to continue to come down over the summer months, bringing additional homebuyers back into the market,” Sam Khater, Freddie Mac’s chief economist, said in a statement.

Other general economic news pointed to a broad slowing of the US economy as consumers and businesses are feeling the pinch of higher interest rates. Recurring applications for US jobless benefits rose to the highest level since the end of 2021, a warning sign suggesting that it’s taking longer for unemployed people to find a job. Continuing claims, a proxy for the number of people receiving benefits, increased to 1.84 million in the week ended June 15, according to Labor Department data released Thursday. Meanwhile, first-time claims ticked down to 233,000 last week, a period that included the Juneteenth holiday. After the continuing claims release, yields on the US 10-Year Treasury dropped from 4.33% to hover around 4.28% in mid-afternoon trading Thursday. Although US first quarter GDP was revised up to 1.4% from the prior 1.3%, there were signs of underlying weakness in the numbers. The government marked down personal spending — the main engine of the economy — by half a percentage point to an annualized 1.5% in the first quarter. Separate releases on Thursday showed declines in orders and shipments of certain business equipment as durable goods new orders were revised down to 0.2% for April from 0.6%, the Census Bureau said. Core capital goods shipments, a figure that is used to help calculate equipment investment in the government’s gross domestic product report, decreased 0.5%, the most in three months. Domestic producers face the challenge of a stronger US dollar that risks depressing export demand. The US currency has climbed this year on expectations the Fed will keep interest rates higher for longer. Businesses are also feeling the pinch of elevated borrowing costs. The value of core capital goods orders, a proxy for investment in equipment excluding aircraft and military hardware, matched the biggest drop this year, Commerce Department figures showed this week.

Interest Rate Insight and the Fed

Federal Reserve Bank of Chicago President Austan Goolsbee welcomed cooling inflation data and said it may be appropriate to start thinking about whether policy is putting too much pressure on the economy. “If we get more months like what we have just seen in the last month on inflation, coupled with slowing conditions in some of the other parts of the real economy, then you would have to start questioning, ‘Should we remain as restrictive as we’ve been?’” Goolsbee said Monday on CNBC. Goolsbee said he’s “hopeful” the Fed will get a little more confidence that inflation is headed back to the central bank’s 2% target. The Chicago Fed chief also nodded to the growing divergence between Fed policy and other central banks — like the European Central Bank — which have already begun to lower interest rates. “Taken in the context of how all the other advanced economies are doing, it’s worth wondering about where we are on our restrictiveness scale,” he said. He further indicated that policy is currently at “somewhat historic” restrictive levels. He added the Fed should be restrictive when there’s a danger of overheating, but that he can’t describe what’s happening to the real side of the economy as overheating right now. “If you’re going to be extra restrictive for too long, you’re going to have to start worrying about what’s happening to the real economy,” Goolsbee said. He also noted the recent trend of rising unemployment insurance claims, rising delinquencies and cooling consumer spending.

Impactful International News

Germany’s business outlook worsened for the first time in five months — a sign that the gradual recovery in Europe’s biggest economy faces headwinds. An expectations gauge by the Ifo institute fell to 89 in June from 90.3 in the previous months — defying analyst predictions for an improvement. A measure of current conditions held steady. “It’s a setback,” Ifo President Clemens Fuest said Monday on Bloomberg Radio. “We’ve seen some improvements in recent months, but now this seems to have stopped. The negative data we’re seeing is coming in particular from manufacturing.” The reading highlights the challenge in moving past the recent years’ economic malaise, with consumers remaining hesitant despite rising incomes and cooling inflation. Output expanded 0.2% in the first quarter, helped in part by mild weather. The Bundesbank said last week that growth is set to continue in the three months through June. In the country’s large manufacturing sector, firms “are now telling us that the order backlog is a problem,” Fuest said. He also pointed to “bad data from retail,” which signaled that the expected rebound in consumption on the back of rising wages is “just not happening.” The drop in the June readings of Ifo business climate index and PMI suggest that the recovery of the German economy might be bumpier than it seemed a few weeks ago. This is mainly due to a grimmer outlook for the industrial sector, while activity in the service sector is likely to gain more momentum. Bright spots were visible in services, where the outlook for the second half of the year continued to brighten. Sentiment improved especially in the hotel sector. There have been other indications that any recovery won’t be strong. Business surveys by S&P Global last week showed momentum softening due to weaker industrial output. Investor expectations also improved less than economists had anticipated. Subdued foreign demand and high borrowing costs are a major obstacle for Germany’s manufacturing sector, which has lagged behind services in recent months. The threat of greater trade tensions with China is an additional worry. “Automotive companies are concerned about the prospect of tariff war with China, but it’s also a domestic problem,” according to Fuest. “We’ve been seeing reluctance of companies in Germany to invest domestically, and the investment-goods industry suffers from that and sees declining orders.” While monetary easing by the European Central Bank should help reverse that development, officials have made clear that they’ll be cautious in lowering borrowing costs. Investors only expect between one and two further cuts this year.

As always, stay tuned!

Company Events

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