WEEKLY INSIGHTS

July 29, 2024
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Key Takeaways:

  • Housing market remains weak.
  • S. economic activity increases as consumers remain resilient.
  • Fed’s preferred inflation gauge shows further signs of moderating.
  • Global equities fall as rotation out of tech continues.
  • Treasury yields fall amid decelerating inflation.
  • Crude oil prices fall as outlook for Chinese demand falls.

Weekly Economic Recap — Inflation Continues to Moderate

Sales of previously owned homes fell to the slowest pace this year. The median selling price of existing homes increased to a record-high $426,900. At current sales pace, it would take 4.1 months to sell inventory, the longest in four years.

Sales of new homes in the U.S. fell to a seven-month low in June amid elevated mortgage rates and home prices. Inventory of new homes increased to 476k, the most since 2008. At the current sales pace, it would take ~9.3 months to work through the existing supply, the longest since 2022.

The S&P Global Composite PMI increased to a reading of 55, indicating the fastest pace of expansion since April 2022. The increase was driven primarily by an increase in activity at service providers, increasing the most since March 2022. Prices paid showed rising costs for shipping and wages, but the gauge still fell to a six-month low.

The U.S. economy increased at a faster than expected pace in 2Q24 (2.8% QoQ vs. 1.9% QoQ est.). Consumer spending, which accounts for ~70% of U.S. GDP, increased 2.3% QoQ as spending on both services and goods providers increased modestly. Imports detracted from the headline increase, amid the steepest increase since 1Q22 (6.9%).

The Fed’s preferred inflation gauge, PCE Core, rose slightly in June, which kept the year-over-year reading at 2.6%. Goods prices fell 0.2% for the month, but increases in service prices offset those falling prices.

Personal income increased less than expected (0.2% MoM vs. 0.4% est.). The savings rate fell to 3.4%, the lowest level since November 2022.

Weekly Market Recap — Growth Sectors Fall as Investors Continue Rotation to More Rate-Sensitive Sectors

Equities: The MSCI AC World Index was lower for the second straight week as investors continued to rotate out of mega-cap tech winners into more interest rate-sensitive areas of the market. In the U.S., small-caps led performance as the Russell 2000 was higher for the third straight week. The blue-chip Dow Jones Industrial Average was also higher, while the Nasdaq and S&P 500 both fell for the second straight week.

Fixed Income: The Bloomberg Barclays Aggregate Index was higher for the third time in four weeks. U.S. Treasury yields were lower for the week amid easing inflation data. All sectors of fixed income were higher for the week, led by EM debt (USD) and high-yield corporate bonds.

Commodities/FX: The Bloomberg Commodity Index was lower for the third consecutive week. Crude oil prices fell for the third straight week on a tepid outlook for China demand. Gold prices were lower for the second straight week and the US Dollar was lower.

Key Takeaways:

  • One year anniversary of last rate hike in this cycle.
  • Futures may be pricing in chance of cut this week, but it is unlikely.
  • A look at past economic data when Fed cuts rates.
  • Labor market worsening but underlying rate still strong.
  • The Fed needs to tread lightly as to not reignite inflation.

Theme of the Week — One Year Since the Fed Hiked Rates….When to Expect a Cut?

Last week (7/26) was the one-year anniversary of the last rate hike in this cycle for the Federal Reserve. While the futures market has priced in a small chance of a rate cut at the meeting this week (Wednesday), we find that unlikely. Instead, when we look at historical economic data, it suggests a cut in September can be on the table, but only if inflation continues to moderate and the economy continues to slow.

We looked at each cycle since 1960, when the Fed went on pause, and of all the cycles, if the Fed cuts in September, this would be the fourth longest time the Fed was on hold. When we look at GDP in the trailing four quarters as of 2Q24 it is relatively in line with the level of GDP when the Fed has cut rates in the past. The unemployment rate has been increasing more than in the past when the Fed cuts rates. However, the actual unemployment rate is much lower. In fact, it has only been lower on three other occasions we monitored.

The Fed has said they need more evidence inflation is coming down to the 2% level. While it is not there, it is lower than in past rate cuts. The two pieces of data that we think have the Fed walking a fine line are the real Fed funds rate and leading indicators. The economy is decelerating quickly as seen by leading economic indicators which would suggest a rate cut is necessary. However, the real Fed funds rate is not nearly as restrictive as it has been in the past. This is concerning because if the fight on inflation is not definitively over, cutting rates too soon could reignite inflation.

Footnotes: Data is as of July 26, 2024.

Source: Bloomberg Finance LP, Verdence Capital Advisors.

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

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