Weekly Market Update: Economic Growth Slows, Fed Raises Rates, and PCE Remains Subdued

  • Economic growth indicates a slowdown, raising concerns for future conditions.
  • The U.S. Federal Reserve raises interest rates by 25 basis points, reaching the highest rate since 2001, to tackle “elevated” inflation.
  • Personal Consumption Expenditures (PCE) show a mild increase, but inflation remains a persistent concern impacting U.S. households.

The S&P Toronto Stock Exchange (TSX) finished the week slightly lower, despite oil jumping on supply concerns primarily linked to output cuts by Saudi Arabia and Russia. U.S. equities finished the week with a strong rally on several important data releases, high-profile corporate earnings announcements and the Federal Reserve meeting. Growth outpaced value stocks with the technology-focused Nasdaq leading. In Europe, stocks rallied, as investor sentiment appeared elevated from policymakers’ dovish comments following the European Central Bank rate hike.

On Monday, the S&P flash U.S. Manufacturing Purchasing Manufactures’ Index surveys for July showed the U.S. economy experienced its slowest growth in five months, indicating potentially weaker conditions later in the year. The S&P flash U.S. Services-Sector Index dropped to 52.4 from 54.4 in the previous month, the lowest reading since February. Most Americans are employed in service-related sectors, such as technology, healthcare, finance and hospitality. The S&P U.S. Manufacturing-Sector Index rose to 49 from 46.3 but has remained in negative territory for several months. New orders slightly increased, but overall demand was relatively soft, and hiring showed its weakest performance since January. Prices for raw materials and labor continued rising, raising concerns about persistent inflationary pressures. Despite the large service sector supporting the U.S. economy, it is losing momentum. Manufacturers face difficulties in the U.S., Europe, and other parts of the world due to consumer spending shifting towards services rather than goods1.

In May, U.S. house prices rose by 0.7% compared to April, according to the Federal Housing Finance Agency (FHFA). This data was part of their seasonally adjusted monthly House Price Index (HPI®) report released on Tuesday. Compared to May 2022, house prices rose by 2.8%. The April increase of 0.7% remained unchanged. The monthly price changes varied across different census divisions, ranging from -0.5% in the New England division to +1.7% in the Pacific division. For 12 months, price changes ranged from -2.7% in the Mountain division to +5.5% in the East North Central division2.

In June, sales of newly built homes in the U.S. declined by 2.5% compared to the previous month, as demand cooled off following a surge in sales. The Commerce Department reported an annual rate of 697,000 new-home sales in June, down from a revised figure of 715,000 in May. This number is seasonally-adjusted and represents the projected number of homes sold over a year if builders maintain the same monthly pace. In June, the median sales price of a new home in the U.S. decreased slightly to $415,400 from the previous month’s $416,300. New homes have become more affordable in recent months, approaching the median price of existing homes, which was $410,200 in June, according to the National Association of Realtors. The supply of new homes for sale declined by 2.8% between May and June, resulting in a 7.4-month supply. Regionally, the Northeast saw a significant increase in new-home sales with a 21% rise, offset by notable drops in the Midwest and West. Overall, new-home sales have increased by 24% compared to the previous year, indicating a positive trend in the market. Due to a lack of available existing homes for sale, many buyers have turned to the new-home market, although high mortgage rates may dampen demand. Ahead of the U.S. Federal Reserve’s meeting, the 30-year rate averaged 7%, with expectations of another increase in the central bank’s benchmark interest rate3.

On Wednesday, the Federal Reserve raised its benchmark interest rate by 0.25% to 5.25% to address “elevated” inflation. This is the highest rate since 2001. Federal Reserve Chair Jerome Powell emphasized the commitment to bring inflation back to the 2% target. The decision was unanimous, and the Fed will continue monitoring inflation, employment and economic growth before deciding on further rate adjustments. Powell stated that the Fed might raise rates again in September if the data supports it, or they might choose to keep rates steady. With positive signs in June consumer inflation data, some economists believe this rate hike could be the last in the cycle. Before the September meeting, the Fed will closely watch economic indicators, such as employment and consumer inflation reports, in July and August to make further decisions. There are varying opinions on future rate policy, with some economists predicting at least one more rate increase this year, while others are concerned that the Fed may have already done too much. The economy has remained resilient, alleviating fears of an imminent recession. Once the Fed decides it no longer needs to raise rates, Powell mentioned that they will maintain rates at a restrictive level to allow inflation to decrease gradually. Economists generally expect no rate reductions until the next spring4.

On Thursday, the U.S. initial claims for unemployment benefits for the week, ending July 22, decreased by 7,000 over the previous week to 221,000. Benefits for all programs for the week ending July 1 were 1,913,225 – an increase of 165,181 from a week earlier5.

Also on Thursday, orders for durable goods in the U.S. surged by 4.7% in June, primarily driven by a substantial increase in new contracts for Boeing passenger planes. Excluding the volatile transportation segment, orders rose a milder 0.6%, still indicating growth. Notably, orders for passenger planes experienced significant fluctuations throughout the year, contributing to the overall swings in the durable goods report. In June, plane bookings surged by 69% due to a large order for Boeing planes from Air India. Orders for new autos increased only slightly by 0.3% in June. However, orders showed a mild increase of 0.6% across all major categories when excluding planes and cars. The core measure of business investment rose by 0.2%, indicating some improvement in the manufacturing sector. Core orders have experienced slower growth at 1.9% in the past year compared to 7.2% in the same period in 20226.

In June, the cost of goods and services in the U.S. saw a mild 0.2% increase, indicating further easing of inflation. Economists had anticipated this 0.2% rise in the Personal Consumption Expenditures Index. Over the past year, the price increase slowed from 3.8% to 3%, approaching its lowest level since October 2021. The core PCE rate of inflation, which excludes volatile food and energy costs and is considered a better predictor of future inflation trends by the Federal Reserve, also rose by 0.2% in June. However, the core inflation rate over the past year demonstrated a slightly smaller slowdown, decreasing from 4.6% to 4.1%, but it remains significantly above the Fed’s 2% target. Inflation has decelerated this year due to declining energy and food prices. However, it is still rising at a rate that concerns the Federal Reserve and continues to impact U.S. households financially7.

The University of Michigan reported Friday that consumer sentiment in the U.S. rose for the second month, reaching its highest level since October 2021. The sentiment increased 11% from June, driven by improved long-term and short-run business conditions. This rise was attributed to a slowdown in inflation and stable labor markets. However, sentiment declined among lower-income consumers, who expect worsening inflation and income prospects. Year-ahead inflation expectations increased slightly to 3.4% in July, while long-run inflation expectations remained unchanged at 3.0%, staying within the 2.9-3.1% range observed for most of the past 24 months8.

Looking forward, July witnessed slower economic growth, weaker job creation, decreased business confidence and persistent inflation, dampening business optimism about the future outlook. The latest PCE report will likely give the Federal Reserve more optimism about the inflation situation, but the overall concern over inflation and its impact on the economy remains.










Important Information:

Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.

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