Economic Commentary

After retreating 4% in April, the S&P 500 bounced back in May reaching a new record high on 5/21 and closing out the month with a 5% return. The bull market continues with gains in six of the last seven months contributing to a return of more than 11% year-to-date and more than 28% over the last year. Core bond prices recovered 1.2% as rates moved lower contributing to a modest year-to-date decline of 0.3%. The yield on U.S. ten-year Treasuries fell 19 bps after climbing 80 bps year-to-date through April.

One of the catalysts for recent positive stock and bond returns was the May 1 FOMC meeting. Last year, the monetary policy discussion shifted from the prospect of additional rate hikes to the timing and extent of potential rate cuts. However, both the “timing” and the “extent” have been the subject of much debate and evolving expectations.

After keeping interest rates unchanged since July 2023, policymakers at the Federal Reserve acknowledged for the first time in December that the current policy rate range of 5.25%-5.50% was likely at-or-near peak levels for this tightening cycle. Entering 2024, investors were pricing in six 0.25% rate cuts by the end of the year with the first expected in March.

The prevailing view was that inflation would continue to lower, the economy would slow, and the Fed would be compelled to provide more accommodative policy rates. In the first quarter, it became evident that progress on inflation had stalled out, while the labor market remained more robust than anticipated, giving rise to the notion that rates would stay “higher for longer.”

Investors begrudgingly revised their expectations, pricing fewer and fewer cuts as time passed. In March, investors were aligned with updated FOMC dot plots that showed expectations for three 0.25% rate cuts in 2024. Today, investors are pricing in just one to two cuts this year.

At the May 1 FOMC press conference, Chair Jerome Powell characterized the current stance of monetary policy as “restrictive”, highlighting evidence that interest rates were weighing on housing and equipment investment. He reiterated that the prospect for cuts would be based on incoming data and stated that there are paths the economy could take that would lead the Fed to cut rates, specifically: progress on lowering inflation or unexpected weakness.

The FOMC has five more meetings in 2024. The next meeting is June 12. If the Fed is truly data-dependent, it behooves us to look at recent and upcoming data releases to anticipate messaging and policy actions at the meeting.

• The second estimate of Gross Domestic Product (GDP) was released on May 30 and showed a slight decline to 1.3% from the advance release which indicated 1.6% real growth (QoQ SAAR %).
• The April PCE price indices were released on May 31 and showed a 2.7% increase in prices – consistent with the March reading. Although the CPI index generates more headlines, the FOMC actually uses the PCE index when gauging its 2% inflation target.
• April job openings (JOLTS) will be released June 4. Job openings have declined from around 12 million in early 2022 to around 8.5 million as of March 2024. Declining job openings has given the FOMC confidence that a wage-price spiral is less likely to emerge.
• The May jobs report is due out on June 7. Consensus expectations call for 190K payroll additions and no change to the unemployment rate at 3.9%. If the report aligns with these expectations, it would be a near-repeat of April (+175K new jobs), which marked a steep deceleration from an average of 270K new jobs per month in the first quarter. We’ll also be interested in wage growth data contained in the same release which tends to be a leading indicator for the path of inflation.
• The May CPI report due on June 12 will provide insight into whether a softening labor market is impacting inflation. After falling sharply from a peak of 9.1%, year-over-year inflation figures have been range bound between 3% and 4% for the last year. A move outside of this range (in either direction) would certainly impact market expectations for the future path of interest rates.

The next FOMC meeting, which concludes on June 12 will offer an updated view into the Fed’s calculus, incorporating the new information detailed above among other factors. While there is little chance that policymakers will adjust rates this month, we expect an update on the Fed’s plans for quantitative tightening and the committee will deliver an updated summary of economic projections (SEP), which details forward expectations for GDP growth, inflation, and unemployment and includes an updated dot plot highlighting committee members expectations for the forward path of policy rates.

As always, we look forward to sharing our views as we navigate the balance of 2024, and we encourage investors to lean on discipline and the benefit of a long time horizon during periods of uncertainty. On behalf of the entire team, thank you for allowing us to serve on your behalf.