WEEKLY INSIGHTS

May 20, 2024
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Important Disclosures

Key Takeaways:

  • Inflation expectations rise to highest since November.
  • Shelter and housing prices remain sticky.
  • Consumer spending stagnates amid higher prices.
  • Dow Jones closes above key 40,000 level; growth outperforms.
  • Yields retreat as expectations for rate cuts rise, again.
  • Commodities higher led by crude oil and gold prices.

Weekly Economic Recap — Inflation Modestly Eases by Expectations Increas

Consumer expectations for inflation and home prices increased in April, according to the New York Fed Survey. One-year ahead inflation expectations increased to 3.3%, the highest level since November, while home price growth expectations increased at the fastest pace since July 2022.

Small business optimism as tracked by the NFIB Small Business Index increased for the first time this year in April. Seven of the ten components that make up the index increased, led by a sharp uptick in sales expectations and plans to increase capital spending.

Producer prices increased more than expected in April driven largely by prices paid for services. The headline services index increased at the fastest monthly pace (0.6%) since July 2023 as prices for portfolio management services jumped by the most since December.

Headline inflation as tracked by the Consumer Price Index increased slightly below consensus estimates (0.3% MoM vs. 0.4% MoM est.). Shelter and energy prices remain stubbornly high as both components drove the increase at the headline level, accounting for over 70% of the increase. CPI Core, which excludes volatile food and energy prices, increased at the smallest annualized pace since April 2021.

Consumer spending stagnated in April as headline retail sales were unchanged from March. Seven of the thirteen categories posted sales decreases during the month, led by nonstore retailers. Sales at gasoline stations increased by the most since August.

Weekly Market Recap — Equities Rally on Renewed Hopes of Fed Rate Cuts

Equities: The MSCI AC World Index was higher for the fourth straight week as expectations for Fed rate cuts this year were reignited after signs of inflation easing modestly. All major averages in the U.S. were higher for the week with growth areas of the market (i.e., technology) outperforming. The Dow Jones Industrial Average was higher for the fifth straight week and closed above the key 40,000 level for the first time in history.

Fixed Income: The Bloomberg Barclays Aggregate Index was higher for the third straight week as Treasury yields in the U.S. fell (prices rose) after the release of key inflation data. Municipal bonds were lower for the first time in three weeks. All other areas of fixed income were higher for the week, led by EM debt (USD) and investment grade bonds.

Commodities/FX: The Bloomberg Commodity Index was higher for the second straight week. Metals (e.g., copper) were higher for the second straight week as economic data out of the U.S. and China suggested global demand could be higher than originally anticipated. Gold prices were higher for the second straight week on hopes of Fed rate cuts later this year.

Key Takeaways:

  • Inflation is likely to show up at Memorial Day celebrations this year.
  • Food prices are still running ~2% higher than last year.
  • Travel expenses to put a strain on consumers, thanks to crude oil prices.
  • Alcoholic beverage options could be different this year.
  • Enjoy the time with family and friends!

Theme of the Week — Cost of Enjoying Memorial Day Holiday is Higher in 2024

Last week’s headline inflation data as tracked by the Consumer Price Index showed moderate signs of easing, but it is still growing well above the Fed’s 2% target. As Americans prepare to travel for the upcoming Memorial Day holiday, we wanted to look further into the CPI report to better prepare consumers for the additional costs they may face due to ongoing inflation pressures. An estimated 43.8 million people are expected to travel more than 50 miles from home, according to statistics from AAA.1 For those traveling by car, the cost at the pump is a bit higher than last year. In addition, we hope that you do not need to have any car maintenence before you hit the road because those costs have increased almost 10% over the past year.

For those participating in a traditional Memorial Day cookout, consumers can expect higher food prices to feed your guests. Last week’s CPI data showed food prices are roughly 2% higher than last year. On the bright side, food prices at this point last year were growing almost 7% on a year over year basis. Please read on to find some other points regarding the cost of enjoying the upcoming Memorial Day weekend.

  • Expect to pay more for travel plans: Among the roughly 44 million Americans expected to travel during the Memorial Day holiday, which AAA tracks as Thursday, May 23rd – Monday, May 27th, about 38 million of them will travel by car while the rest will travel by air or “other.” Travelers can expect to pay ~$3.60/gallon at the pump, which is the national average as of May 19th, and is ~$0.05 higher than last year.2 Domestic airfare will cost ~2% more than last year, with the average round-trip ticket costing $778.
  • Memorial Day barbeque may look different: Food prices at home (e.g., food costs at grocery stores) continue to squeeze consumers’ wallets which could have an impact on the typical Memorial Day barbeque. Inflation data released last week showed beef prices are ~7% higher than last year. In addition, fruit and vegetable prices are ~2% higher than last year. Instead of hamburgers and fruit salad, Americans may want to opt for fish and seafood. Those prices have been falling on an annualized basis for the past eight months.
  • Opting for cheaper drink options: Alcoholic beverages are ~2% more expensive than last year. Beer and other malt beverages just posted their largest monthly gain since December 2022 and are ~3% higher than a year ago. Those celebrating with a beverage this Memorial Day weekend may find themselves sipping on more wine than usual as those prices are only ~0.8% higher than last year.

The Bottom Line:

We realize that the growth rate of inflation is slowing and that is good news for the Fed. However, for consumers it may not feel that way. Even though a necessity such as food may only be seeing prices growing ~2% over the past year, that comes after they were growing ~7% on a year over year basis just one year ago. In addition, food prices are still almost 30% higher than they were before the pandemic (Dec 2019). This is why confidence remains weak amongst consumers. They are still feeling the compounding effect of years of inflation pressures. We are starting to see this filter into spending and expect consumers to continue to be strained.

Footnotes: Data is as of May 17, 2024.
Source: Bloomberg Finance LP, Verdence Capital Advisors.

1: https://info.oregon.aaa.com/nearly-44-million-americans-planning-memorial-day-getaway/
2: https://gasprices.aaa.com/

Disclaimer: © 2024 Authored by Megan Horneman, Chief Investment Officer, Verdence Capital Advisors, LLC

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