- Home sales increased due to limited availability, as homeowners with low-interest rate mortgages are hesitant to sell.
- During a panel discussion with central bankers from the U.S., European Central Bank, U.K., and Japan, U.S. Fed Chairman Jerome Powell reaffirmed the Federal Reserve’s commitment to combat inflation until evidence shows it is moving towards their long-term 2% target.
- Members of the FOMC anticipate further interest rate hikes in the second half of the year.
- The PCE (personal consumption expenditures) headline and core indicators are showing a continued slowdown.
Equity markets ended both the week and quarter with strong gains. As the week progressed, the rally gained strength, with small-cap and value shares enthusiastically joining in. The equally-weighted S&P 500 outpaced the market-weighted S&P 500 in the week. The mega, tech-laden Nasdaq continued to show leadership with a gain of more than 31% year-to-date, while the broader-based indices trailed.
Despite its overweight position in the commodity sector and financials compared to other indices, the TSX fell behind in performance year-to-date. However, it managed to make a recovery in the final week of the quarter. European equities rallied on hopes that China would increase consumption and that inflation data would moderate, causing the Central Bank to end the restrictive interest rate policy.
Orders for durable goods spiked 1.7% in May – a rise for the third month in a row – following a 1.2% increase in April. Excluding transportation, new orders rose 0.6% in May, shipments increased 1.7%, inventories rose 0.2% and unfilled orders rose 0.8%. New orders for passenger planes jumped 35% in May, offsetting a 35% drop in military aircraft. New orders for nondefense capital goods increased by 6.7% in May, shipments were up 3.4%, unfilled orders increased by 1.1% and inventories increased by 0.1%. Defense new orders for capital goods plummeted 14.7% in May.1
According to the U.S. Census Bureau and Department of Housing, new home sales rose 12.2% over the revised April number. The median price of new homes sold was $416,300, with an average sale price of $487,300. Inventories of new homes available at the end of May stood at 428,000, or 6.7 months, at the current sales rate.2 With the recent increase in mortgage rates, existing home sales have slowed, as homeowners continue to hold on to ultra-low mortgage rates refinanced during the pandemic.3 According to the S&P CoreLogic Case-Shiller U.S. National Home Price Index, despite the high mortgage rates, the tight supply has contributed to higher home prices, which increased in April by 0.9%. Home prices were the strongest in the Southeast, while many other regions suffered a decline.4
As measured by the Conference Board, U.S. consumer confidence increased in June to 109.7 from 102.5 in May. The latest reading reflects consumer confidence that inflation is slowing, and recession worries are postponed for the foreseeable future. Based on consumers’ assessment of current business and labor market conditions, the Present Situation Index rose to 155.3 from last month’s 148.9. The Expectation Index,based on short-term consumer outlook for income, business, and labor market conditions, rose to 79.3 from May’s reading of 71.5. A reading below 80 is associated with a recession within one year. The Board’s Confidence Index for June is the highest reading since January 2022.5
At a conference on Wednesday, Chairman Jerome Powell reiterated that the Federal Reserve’s work is still ongoing. “In the beginning, there was a little risk of overdoing it and a lot of risk of underdoing it. As you get closer and closer to where you think you’re going to your destination, those risks begin to become more into balance,” said Powell in comments during a panel discussion at the Bank of Spain’s Financial Stability Conference. “I wouldn’t say they’re in balance yet.” The top Central Bankers of the E.U., Britain, Japan and the U.S. vowed to keep working on inflation until evidence proves they have succeeded. “Although the policy is restrictive, it may not be restrictive enough, and it has not been restrictive for long enough,” said Powell, noting that most of his colleagues expect two more rate hikes this year.6
On Thursday, the government reported that the U.S. economy grew at a robust 2% in the first quarter, revised from the previous estimate of 1.3%. Higher interest rates were supposed to slow economic activity this year, but consumer spending rose 4.2% after the prior year’s 3.8% annual increase. Rising wages and the largest increase in Social Security benefits in years helped consumers. Auto sales were strong, and exports were stronger than expected7. Initial unemployment claims for the week ending June 24 were 239,000 – a 26,000 decrease from the previous week. Claims for all benefit programs for the week ending June 10 were 1,697,781 – an increase of 22,947 from the last week.8
On Friday, the U.S. government reported that the personal consumption expenditures (PCE) for May rose 0.1% after gaining 0.4% in April, and the core rate, excluding energy and food, increased 0.3%, which is down 0.1% from the previous month. On an annualized basis, the Personal Consumption Expenditures Index gained 3.8% compared to 4.3% at the end of April, and the core rate rose 4.6%, a -0.1% decline over the month. Personal income and disposable income rose 0.1% to 0.4% for both indexes. Personal consumption increased by 0.1% in May compared to a gain of 0.4% in April.9
The run-up of the Nasdaq and S&P 500 in the first half of the year has prompted analysts to debate whether we have entered a new bull market versus a bear market rally. The resilience of the U.S. economy has surprised everyone despite the rapid pace of interest rate increases over the last year. This may be provoking hope that any coming recession is likely to be mild. However, it should be noted that the performance of the Nasdaq and the S&P 500 is attributed to five to seven mega-cap tech names and that the more general market performance (up closer to 7% to 8%) is more reflective of the general economy, which is muddling along.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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