S&P hits all-time high, yields fall
Summary
Markets were inundated with economic data and news last week, giving investors plenty to consider. Tensions eased in the Middle East with the announcement of a ceasefire between Israel and Iran, although the situation remains fragile. Additionally, President Trump announced he is moving towards making his pick for the next Federal Reserve Chair, stating he has “three or four people in mind.” It would be unusual to make an announcement this early, given that Chair Powell still has 11 months left in his term, but it remains consistent with President Trump’s plan to have the new Fed Chair “shadow” the current institution — an idea that has been floating around since November. President Trump made his frustrations clear regarding Chair Powell’s decisions to hold rates, and he seems to be gaining support in this belief, with Fed Governors Waller and Bowman both stating that a July cut is possible. Overall, markets reacted favorably with the S&P climbing 3.45% closing at a new all-time high, and the 10-year U.S. Treasury declining 10bps to close the week at 4.29%. Oil also fell sharply as conflict in the Middle East appeared to stabilize.
PCE
The PCE report brought a few surprises, notably with both personal income and personal consumption missing expectations. Both declined on the month at -0.4% and -0.1%, respectively. There are some anomalies in the income data due to the changes in social security benefits earlier this year, so the coming months will shed light on whether this is simply a reporting issue or a sign of weakness. The headline PCE price index increased 0.1% on the month and 2.3% year-over-year, exactly in line with expectations. However, the core PCE price index increased 0.2% on the month and 2.7% year-over-year, slightly higher than expected. The core PCE made no progress towards the Fed’s 2% goal, setting up an interesting dynamic surrounding future rate cuts. This is especially prevalent as the Fed is facing more political pressure and the possibility of an early announcement for the next Fed Chair. The futures market is currently pricing in three cuts for the remainder of the year, but these probabilities are subject to change as the situation evolves.
Source: Chatham Financial
Other key news and releases
Existing home sales beat expectations but remain near historical lows, while new home sales of 623,000 units were well below expectations. On a brighter note, the pending home sales index markedly beat expectations with a 1.8% increase on the month. Additionally, the Case-Shiller home price index declined 0.3% on the month. While the pending sales index was positive, most of the data suggests a housing market that remains sluggish due to persistently high mortgage rates.
Regarding general economic activity, the S&P PMI Composite Flash reading was in line with expectations at 52.8, although it decreased slightly from May’s reading. Consumer confidence was below expectations with a reading of 93, as consumers still seem concerned about tariffs. Both the Richmond and Kansas City Fed PMIs remained in negative territory with readings of -7 and -2, respectively. Durable goods markedly beat expectations with a 16.4% increase month-over-month, although that is reflective of transportation in the headline number. However, excluding transportation, the 0.5% increase on the month was still well above expectations. The third revision for GDP was released showing a 0.5% decline overall, with personal consumption being revised down from 1.2% to 0.5%, which is a significant adjustment. Finally, jobless claims eased with weekly claims of 236,000. Overall, the picture remains mixed, and tariff implications are still filtering through the data. As a result, we expect volatility in some of these readings to continue until we get clarity on U.S. fiscal and trade policy.
The week ahead
JOLTS, ISM manufacturing and services PMIs, and the closely watched jobs report will all be released this week. The markets will also watch closely for any updates on U.S. fiscal and trade policy. While the Senate version of the tax and spending bill is progressing, there was a slight setback in trade relations late Friday as President Trump announced he would end trade talks with Canada. On Sunday, however, the Canadian government announced it would rescind a digital service tax in an effort to restart trade negotiations with the U.S.
Disclaimers
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