What We Are Watching This Week

  • US Retail Sales
  • Housing Starts
  • US Leading Indicators

Highlights From Last Week

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

The major indexes mostly ended higher for the week, with the S&P 500 Index and Nasdaq Composite reaching new highs. Despite this, the market’s advance remained notably narrow for the second week, with the equally weighted S&P 500 lagging its capitalization-weighted counterpart by 215 basis points (2.15 percentage points). According to Russell Indexes, the potential of artificial intelligence continued to boost technology-related and growth stocks, which outperformed value stocks by the largest margin since March 2023 (461 basis points). This trend, reflecting the growing influence of A.I. in the market, could lead to further growth in these sectors. Additionally, the week saw Tesla shareholders approve CEO Elon Musk’s approximately USD 48 billion pay package in Tesla stock, likely reflecting optimism over his push for autonomous driving vehicles. Reassuring inflation data and falling interest rates, which increase the theoretical value of future earnings for growth companies, may also contribute to the outperformance of growth shares.

Equities in Toronto ended a challenging week with further losses on Friday, primarily in the consumer and communications sectors. The TSX Composite Index fell by 59.01 points to 21,639.10, down 368 points or 1.67% for the week. The Canadian dollar rose slightly by 0.07 cents to 72.73 cents U.S. On the macroeconomic front, April wholesale trade grew 2.4% to $83.3 billion, and manufacturing sales increased by 1.1%, driven by higher sales of transportation equipment and primary metals. Motor vehicle sales rose to 175,100 in April from 171,600 in March, 1.2%, and energy off 0.9%. Only information technology (up 0.7%) and gold (up 0.2%) showed gains.

The pan-European STOXX Europe 600 Index fell by 2.39% in local currency terms due to political uncertainty following the strong performance of far-right parties in the European Parliament elections. All major European bourses were affected, with Italy’s FTSE MIB dropping 5.76%, Germany’s DAX declining 2.99%, France’s CAC 40 Index falling 6.23%, and the U.K.’s FTSE 100 Index decreasing by 1.19%. Political risk dominated the week as European markets were weighed down by French President Emmanuel Macron’s call for snap legislative elections following the E.U. elections, which showed a shift toward right-wing parties. Additionally, European Central Bank President Christine Lagarde’s comments about continuing restrictive monetary policy and no immediate rate cuts further dampened market sentiment.

U.S. consumer prices remained unchanged in May due to lower gasoline and other goods prices offsetting higher rental housing costs. This development suggests that inflation remains too high for the Federal Reserve to consider cutting interest rates before September. The Labor Department’s report revealed a significant reduction in underlying inflation pressures, with motor vehicle insurance costs decreasing monthly for the first time since late 2021. Financial markets reacted by increasing the probability of rate cuts in September and December.  The unchanged consumer price index (CPI) reading in May followed a 0.3% increase in April, marking the softest reading since July 2022. Economists had predicted a 0.1% rise in May. Lower gasoline prices dropped 3.6%, and stable grocery store prices contributed to the unchanged CPI. However, rents and certain food items increased slightly, like meat and eggs. The annual CPI rose 3.3% over the last 12 months through May, down from 3.4% in April, yet still above the Fed’s 2% target. The core CPI, excluding food and energy, increased by 0.2%, the smallest rise since October, mainly due to higher rent costs. Healthcare and education costs rose, while airline fares and motor vehicle insurance fell. The core CPI’s year-on-year increase slowed to 3.4%, the smallest since April 2021.1

Following two days of FOMC meetings on Wednesday, the U.S. Fed decided to maintain the benchmark interest rate at 5.25%-5.50% and slightly raise the 2024 inflation forecast. This decision, which was closely watched by the market, could significantly impact the future direction of the market. Federal Reserve Chair Jerome Powell was pressed on the timing of potential rate cuts during his news conference but didn’t provide much guidance. Powell avoided giving specific timelines or labor market conditions that would trigger policy changes, indicating a data-dependent approach with a “we’ll know it when we see it” attitude. The Fed’s dot plot shows a median forecast of just one rate cut in 2024, down from three in March. Powell mentioned that policymakers could update their forecasts based on new data but noted that most don’t. The Fed’s policy remains highly dependent on economic data, which is currently difficult to predict, leading to a lack of specific guidance​​.2

In the week ending June 8, the seasonally adjusted initial claims for unemployment benefits reached 242,000, marking an increase of 13,000 from the previous week’s unchanged level of 229,000. The four-week moving average rose to 227,000, up 4,750 from the prior week’s unchanged average of 222,250. For the week ending May 25, the total number of continued claims for benefits across all programs was 1,693,732, an increase of 2,913 from the previous week. In comparison, there were 1,619,343 claims filed for benefits in the corresponding week of 2023.3

The Producer Price Index for final demand decreased by 0.2 percent in May, seasonally adjusted, as the U.S. Bureau of Labor Statistics reported. This follows a 0.5 percent increase in April and a 0.1 percent decrease in March. On an unadjusted basis, the index for final demand rose 2.2 percent over the 12 months ending in May. The decline in final demand prices in May is primarily due to a 0.8 percent drop in the index for final demand goods, while prices for final demand services remained unchanged. Excluding foods, energy, and trade services, final demand prices were unchanged in May, after a 0.5 percent increase in April. For the 12 months ending in May, the index for final demand, which is less food, energy, and trade services, increased by 3.2 percent.4

Despite the sharp fall in consumer sentiment in June, the U.S. economy demonstrated its resilience and continued to grow. Higher prices, however, remained a burden for Americans. According to the University of Michigan consumer sentiment survey released on Friday, sentiment dropped to its lowest level in seven months, with the index reading at 65.6, down from 69.1 in May and below the 72 expected by economists. “Assessments of personal finances dipped due to modestly rising concerns over high prices as well as weakening incomes,” stated Joanne Hsu, director of the Survey of Consumers. “Overall, consumers have perceived a few economic changes since May.” The current conditions index decreased to 62.5 from 69.6 the previous month, driving down June’s overall index. Friday’s reading indicates that households are now struggling more under higher interest rates and still elevated consumer prices.5

WKYear to Date
S&P400 Mid-cap-0.87%4.09%

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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The opinions and information contained in this article are those of Sightline Wealth Management (“Sightline”) as of the date of this article and are subject to change without notice. Sightline endeavours to ensure that the content has been compiled from sources that we believe to be reliable. The information is not meant to be used as the primary basis of investment decisions and should not be constructed as advice. Each investor should obtain independent advice before making any investment decisions.

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