MARKET UPDATE: CONSUMER PRICE INDEX; US FED RATE DECISION; PRODUCER PRICE INDEX

What We Are Watching This Week

  • Consumer Price Index
  • US Fed rate decision
  • Producer Price Index

Highlights From Last Week

  • ISM Manufacturing and Services
  • US Job Openings and ADP employment
  • Consumer credit

The major U.S. indexes ended the week with mixed results as investors weighed contradictory economic data. The S&P 500 and Nasdaq Composite reached record intraday highs, while smaller-cap indexes declined. Growth stocks significantly outpaced value shares, driven by falling longer-term interest rates that increased the notional value of future earnings. Early in the week, downbeat economic readings rekindled concerns about “stagflation”—a combination of slowing growth and high inflation.

Canada’s main stock index fell sharply at the end of the week, with materials shares leading the sectoral declines. This drop came after stronger-than-expected jobs data in the United States led investors to reduce their bets on a September rate cut by the U.S. Federal Reserve. The Canadian dollar dropped 0.47 cents to 72.69 cents U.S. after the Bank of Canada reduced the overnight and deposit rates by .25%. On the economic front, Statistics Canada reported that the economy added 27,000 jobs in May, while the unemployment rate rose to 6.2% from 6.1%.

In Europe, the pan-European STOXX Europe 600 Index rose 1.04%, buoyed by the European Central Bank (ECB) cutting interest rates for the first time in five years. Major European stock indexes also saw gains: Italy’s FTSE MIB increased by 0.49%, Germany’s DAX by 0.32%, and France’s CAC 40 by 0.11%, while the U.K.’s FTSE 100 fell by 0.36%. The ECB reduced its deposit rate by a quarter point to 3.75% but did not indicate further cuts. ECB President Christine Lagarde stated that the decision was based on an updated inflation outlook and underlying inflation dynamics, emphasizing that the ECB is not pre-committing to a specific rate path.

In the May Manufacturing ISM Report On Business®, Timothy R. Fiore, Chair of the Institute for Supply Management Manufacturing Business Survey Committee, described the month as sluggish, stable, stagnant, stalled, and stuck. The composite PMI reading was 48.7 percent, indicating a significant contraction for the second consecutive month, dashing hopes of a recovery initiated in March. This contraction, a key indicator of economic health, is a cause for concern. Companies remain hesitant to invest due to uncertainty over U.S. Federal Reserve (Fed) monetary policy and geopolitical tensions. In May, projected capital expenditures dropped from an anticipated 11.9 percent to just 1 percent. The New Orders Index fell to 45.4 percent, its lowest level since May 2023. The Production Index showed resiliency at 50.2 percent, largely due to working off pandemic-era backlogs, but the Backlog of Orders Index fell to 42.4 percent, indicating a potential future production decline. The Employment Index rose to 51.1 percent, indicating cautious hiring, while the Prices Index registered 57 percent, reflecting ongoing inflationary pressures. The Inventories Index dipped slightly to 47.9 percent, with inventory levels remaining high. Fiore emphasized that without a change in Fed policy, the manufacturing sector is likely to remain in its current state of inertia.1

According to the U.S. Bureau of Labor Statistics, U.S. job openings fell significantly more than anticipated in April, dropping by 296,000 to 8.059 million, the lowest level since February 2021. This reduction brought the number of available jobs per job-seeker to its lowest in nearly three years, at 1.24 openings per unemployed person, down from 1.3 in March. This trend, closely monitored by Federal Reserve Chair Jerome Powell, signals a softening labor market that could potentially exacerbate the Fed’s battle against inflation. The decrease in job openings, noted across most sectors except for professional services, private education, retail, finance and insurance, and transportation, suggests a normalization of labor supply and demand. Despite this decline, the labor market is not weakening alarmingly. The number of people quitting their jobs increased by 98,000 to 3.507 million, with the quits rate steady at 2.2% for the sixth consecutive month, the lowest since September 2020. Layoffs also fell to 1.52 million, the lowest since December 2022. Economists had forecast 8.355 million job openings for April. Job vacancies peaked at a record 12.0 million in March 2022, and data for March was revised lower to 8.355 million from the previously reported 8.488 million. Federal Reserve officials are expected to maintain the policy rate at 5.25%-5.50% next week, holding off on rate cuts until inflation shows a more apparent downward trend toward the 2% goal.2

In May, private companies added 152,000 jobs, indicating a cooling labor market compared to the high growth of the past couple of years, according to ADP. This figure fell short of the forecasted 175,000 jobs and followed a downwardly revised increase of 188,000 in April. The services sector saw the most growth, with 149,000 jobs added, particularly in trade, transportation, utilities, education, and health services. In contrast, the manufacturing sector lost 20,000 jobs. Medium and large companies were the primary contributors to the job gains. ADP Chief Economist Nela Richardson noted that job gains and pay growth are slowing, with the labor market remaining solid but showing weaknesses in both producer and consumer sectors. After Tuesday’s Labor Department report of 8.1 million job openings at the end of April, down from 8.36 million in March, continuing a decline from the peak of 12 million in March 2022, Elise Gould, senior economist at the Economic Policy Institute, highlighted that job openings are returning to normal levels.3

In May, the ISM Services Index rose to 53.8 from 49.4 in April, significantly exceeding the consensus expectation of 51.0. Growth was widespread, with 13 of 18 industries reporting expansion, up from 12 in April. The business activity sub-index surged to 61.2 from 50.9, and the new orders index increased to 54.1 from 52.2. The prices paid sub-component fell to 58.1 from 59.2, while the supplier deliveries sub-index rose to 52.7 from 48.5, indicating longer delivery times. The employment sub-component remained in contraction but improved to 47.1 from 45.9. The strong performance in May’s ISM report suggests a significant rebound for the services sector, surpassing expectations and recovering from April’s softness. While most sub-components showed healthy gains, the employment sub-component remained in contraction. Recent JOLTS figures and softening consumer spending suggest a potential decline in economic momentum. However, the robust performance in May raises concerns that April may have been an anomaly, shifting attention to Friday’s payroll release to determine if the labor market is cooling down.4

In the week ending June 1, the U.S. Department of Labor reported that seasonally adjusted initial claims for unemployment benefits rose by 8,000 to 229,000, following a revised increase of 2,000 in the previous week’s level from 219,000 to 221,000. The four-week moving average decreased by 750 to 222,250 after revising the last week’s average from 222,500 to 223,000. The total number of continued weeks claimed for benefits across all programs for the week ending May 18 was 1,690,805, down by 20,125 from the previous week. In comparison, there were 1,634,890 weekly claims filed in the same week in 2023.5

The U.S. economy added 272,000 jobs in May, significantly exceeding the expected 190,000 and countering the fears of a slow labor market. This increase, reported by the Labor Department’s Bureau of Labor Statistics, follows a rise of 165,000 in April. Despite the job gains, the unemployment rate rose to 4% from 3.9%, marking the first time it has surpassed this level since January 2022. The labor force participation rate also declined to 62.5%. The household survey showed a decrease in employment by 408,000, with full-time workers dropping by 625,000 and part-time workers increasing by 286,000. Job gains were prominent in health care (68,000), government (43,000), and leisure and hospitality (42,000), which together accounted for more than half of the total gains. Additional growth occurred in professional, scientific, and technical services (32,000), social assistance (15,000), and retail (13,000). Average hourly earnings rose by 0.4% for the month and 4.1% year-over-year, exceeding expectations. This robust job growth will likely reduce the Federal Reserve’s impetus to lower interest rates.6

WKYear to Date
Dow0.29%2.94%
S&P5001.32%12.10%
Nasdap2.38%14.13%
S&P400 Mid-Cap-2.08%5.00%
Russell-2.10%-0.03%
TSX-1.27%5.00%
Oil-2.30%5.00%
  1. https://www.ismworld.org/supply-management-news-and-reports/news-publications/inside-supply-management-magazine/blog/2024/2024-06/rob-roundup-may-2024-manufacturing-pmi/
  2. https://www.bls.gov/news.release/jolts.nr0.htm
  3. file:///C:/Users/Admin/Downloads/2024-06-05-ADP-National-Employment-Report-Private-Sector-Employment-Increased-by-152000-Jobs-in-May-Annual-Pay-was-Up-5-0.pdf
  4. https://www.prnewswire.com/news-releases/services-pmi-at-53-8-may-2024-services-ism-report-on-business-302163533.html
  5. https://www.dol.gov/ui/data.pdf
  6. https://www.bls.gov/news.release/empsit.nr0.htm

Important Information:

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

Sightline Wealth Management LP (“Sightline”) is an investment dealer and is a member of the Canadian Industry Regulation Organization (CIRO) and the Canadian Investor Protection Fund (CIPF).

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