MARKET UPDATE: ISM MANUFACTURING AND SERVICES, US JOB OPENINGS AND ADP EMPLOYMENT, CONSUMER CREDIT

What We Are Watching This Week

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

Highlights From Last Week

• US Consumer Confidence
• Personal Consumption Expenditures (PCE) & Core PCE
• Personal Income and spending

Most major U.S. stock benchmarks closed lower over the holiday-shortened week, though they finished the month with gains. Small-cap stocks outperformed large-cap stocks and value stocks performed better than growth shares. The Nasdaq Composite was particularly weak, mainly due to a significant drop in Salesforce shares following its disappointing first-quarter revenue report. Markets were closed on Monday for Memorial Day. The week’s market movements were difficult to pinpoint, as economic data mostly aligned with expectations. The Commerce Department’s personal consumption expenditure (PCE) price index report showed core PCE prices rising 0.2% in April, indicating a slight easing in inflation pressures compared to earlier in the year. “Supercore” inflation, excluding energy and housing, rose 0.3%, presenting a mixed inflation outlook.

The S&P/TSX Composite Index gained 197.41 points on Friday, closing at 22,269.12, although it ended the week down by nearly 52 points, or 0.23%. Statistics Canada reported that March GDP was essentially unchanged, with minimal movement in both goods-producing and services-producing industries. However, GDP grew by 0.4% in the first quarter, following no change in the fourth quarter of 2023. The Bank of Canada is anticipated to begin cutting interest rates at its June 5 meeting, with a 64% probability. Markets are also pricing in a potential 35 basis points cut from the Federal Reserve this year, with a 49% chance of a rate cut in September.

The pan-European STOXX Europe 600 Index fell 0.46% in Europe due to the unexpected rise in eurozone inflation. This unexpected inflation raised doubts about the European Central Bank’s potential policy easing beyond June, which in turn led to the index’s decline. France’s CAC 40 Index dropped 1.26%, Germany’s DAX declined 1.05%, Italy’s FTSE MIB ended flat, and the UK’s FTSE 100 Index lost 0.51%.

The Conference Board Consumer Confidence Index® rose to 102.0 in May from 97.5 in April. The Present Situation Index, which evaluates current business and labor conditions, increased to 143.1 from 140.6. The Expectations Index, which reflects consumers’ short-term outlook, climbed to 74.6 from 68.8 but remained below the recession signal threshold of 80 for the fourth month. Dana M. Peterson, Chief Economist at The Conference Board, noted that consumer confidence improved after three months of decline, driven by a robust labor market despite slightly less favorable business conditions. The increase in the Expectations Index was due to fewer consumers anticipating worsening future conditions. Confidence rose across all age groups and was highest among those under 35, earning over $100K. Consumers cited rising prices, particularly for food, as a significant economic concern, with inflation expectations slightly increasing from 5.3% to 5.4%. There was also a slight rise in expectations of higher interest rates. The survey revealed growing recession concerns, contrasting with CEO views, as more consumers saw a recession as likely. However, consumers were optimistic about the stock market, with nearly half expecting prices to rise.¹

The S&P CoreLogic Case-Shiller 20-city home price index in the U.S. increased by 7.4% year-on-year in March 2024, the highest since October 2022, surpassing the previous month’s 7.3% rise and market expectations of 7.3%. This marks the ninth consecutive month of rising home prices. The largest annual gains were seen in San Diego (+11.1%), New York (+9.2%), and Cleveland (+8.8%), while Portland experienced the smallest increase (+2.2%). Home prices climbed by 1.6% in March, the highest monthly rise in nearly a year, following a 0.9% increase in February. All 20 cities recorded month-on-month gains, with Seattle (+2.7%), San Francisco (+2.6%), and Cleveland (+2.4%) showing the most significant increases.²

U.S. economic activity expanded from early April to mid-May. Still, according to a U.S. Federal Reserve survey, firms grew more pessimistic about the future due to weakening consumer demand and modestly increasing inflation. The survey highlighted that the job market is gradually normalizing. Policymakers remain uncertain about when to begin cutting interest rates, which have been held at 5.25% to 5.50% for the past ten months. They are closely monitoring economic activity, employment, and inflation trends to inform their decision. The Fed’s “Beige Book” survey, which polls business contacts across the central bank’s 12 districts, reported varied conditions across industries and regions. Overall, outlooks have become more pessimistic due to rising uncertainty and downside risks, including waning consumer demand and geopolitical tensions. Most districts reported slight or modest growth, with two noting no change. Retail spending was flat to slightly up, reflecting recent consumer spending data. The Fed plans to keep its benchmark interest rate unchanged at the June 11-12 policy meeting. Officials need consistent, positive inflation data before considering lowering rates after being surprised by higher-than-expected price increases earlier in the year. While inflation showed signs of reversing in April, it remains nearly a percentage point above the Fed’s 2% target.³

For the week ending May 25, initial claims for seasonally adjusted unemployment benefits rose to 219,000, an increase of 3,000 from the previous week’s revised figure of 216,000. The 4-week moving average also increased by 2,500 to 222,500. The prior week’s average was revised up slightly from 219,750 to 220,000. For the week ending May 11, the total number of continued weeks claimed across all benefit programs was 1,710,917, a slight decrease of 28 from the previous week. In comparison, there were 1,636,995 claims in the same week in 2023.⁴

In the first quarter of 2024, the real gross domestic product (GDP) grew at an annual rate of 1.3%, according to the Bureau of Economic Analysis’ “second” estimate. This is a revision from the initial “advance” estimate of 1.6%. In contrast, the GDP growth rate was 3.4% in the fourth quarter of 2023. The revision primarily resulted from a downward adjustment in consumer spending. The GDP growth in the first quarter was driven by increases in consumer spending, residential and non-residential fixed investment, and state and local government spending. A decline in private inventory investment partially offset these gains. Additionally, imports, which subtract from GDP, increased.⁵

In April, pending home sales dropped by 7.7%, according to the National Association of REALTORS® (NAR). All four U.S. regions experienced month-over-month and year-over-year declines. The Pending Home Sales Index (PHSI), which forecasts home sales based on contract signings, fell to 72.3, a 7.4% decrease from the previous year. An index of 100 represents the level of contract activity in 2001. NAR Chief Economist Lawrence Yun attributed the decline to rising interest rates in April, which dampened home buying despite increased inventory. He expects a potential rate cut by the Federal Reserve later this year, which could improve conditions with better affordability and more supply. Regional breakdowns showed varied declines: the Northeast PHSI fell by 3.5% from the previous month and 3.1% from April 2023; the Midwest index dropped by 9.5% monthly and 8.7% annually; the South index decreased by 7.6% monthly and 8.2% annually; and the West index fell by 8.5% monthly and 7.3% annually. Despite record-high home prices, Yun expects price increases to slow with more supply, while significant price declines remain unlikely. Any regions with declining prices may offer opportunities for buyers, especially if job growth continues.⁶

According to the Federal Reserve’s preferred PCE index, U.S. prices continued to rise in April, with a 0.3% increase, matching economists’ forecasts. The core PCE index, excluding food and energy, rose by 0.2%, the smallest gain since December 2023, indicating a potential easing of inflation. Over the past year, the core inflation rate held steady at 2.8% for the third consecutive month, just below a three-year low. The overall PCE’s 12-month increase remained at 2.7%. Despite these figures, the Federal Reserve is not expected to alter its timeline for interest rate cuts, maintaining a cautious stance until inflation approaches its 2% target. Investors anticipate the first rate cut around September. Consumer spending, which drives about 70% of the U.S. economy, rose modestly by 0.2% in April, the smallest increase in three months, suggesting that persistent inflation and high interest rates impact household spending power. Economists attribute some of the spending slowdown to an early Easter in March, which may have shifted some expenditures from April. Combining March and April spending indicates a healthier rate. Nonetheless, the modest rise in April is likely to prompt analysts to lower their GDP forecasts for the second quarter following a 1.3% GDP increase. Incomes grew by 0.3% in April, continuing a trend of outpacing inflation but not enough to significantly alleviate household financial pressures.⁷

1. https://www.conference-board.org/topics/consumer-confidence/press/CCI-May-2024
2. https://www.spglobal.com/spdji/en/index-family/indicators/sp-corelogic-case-shiller/sp-corelogic-case-shiller-composite/#overview
3. https://www.federalreserve.gov/monetarypolicy/beigebook202405-summary.htm
4. https://www.dol.gov/ui/data.pdf
5. https://www.bea.gov/news/2024/gross-domestic-product-first-quarter-2024-second-estimate-and-corporate-profits
6. https://www.nar.realtor/newsroom/pending-home-sales-slumped-7-7-in-april
7. https://www.bea.gov/news/2024/personal-income-and-outlays-april-2024

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