This morning, the attention of Wall Street turns to business activity, with a few notable reports on the economy released at 8:30 A.M. (EDT). The Department of Commerce reported its second and final revision to the June-quarter gross domestic product (GDP) and the figure inched up from 1.3% to 1.4%. It also is worth noting that personal consumption growth was revised sharply lower, from 2.0% to 1.5%, which may be a sign of some fatigue in the sector. In a separate report, the Commerce Department said that durable goods orders were up 0.1% in May, which was down from the 0.7% gain recorded in April. Durable goods are products with a lifespan of at least three years and include big-ticket items. Lastly, the Department of Labor reported that initial jobless claims for the week ending June 22nd totaled 233,000, which was down 6,000 from the previous week’s revised figure. However, continuing claims rose again, which may be an indication of some mild softening in the labor market.
These reports suggest that the pace of economic growth is slowing. Our sense is that the performance of the U.S. economy will ultimately determine if and when the Federal Reserve may pivot and begin reducing the benchmark short-term interest rate. The central bank would like to avoid a “hard landing” – a recession -- for the economy as it winds down a two-year stretch of increasingly restrictive monetary policy designed to tame inflation. Treasury yields fell a bit following the economic reports, and the equity futures, which were modestly lower heading into the releases, recovered some, but are still presaging a slightly negative start to the trading day stateside.
Leading into this penultimate trading day of the first half of 2024, which has seen each of the major equity averages establish record highs over the course of the last six months, market action has been relatively constrained. None of the major indexes are far removed from where they started the week and trading volume has been unexceptional. We think investors are in a holding period ahead of tomorrow’s release of the latest personal income and spending data from the Labor Department. That report includes the Personal Consumption Expenditures (PCE) Price Index, which is the gauge of inflation most closely watched by the Federal Reserve (more below).
The PCE has the potential to be a market-moving event for Wall Street, as the figures will bring more information about when it may be appropriate for the central bank to begin cutting the federal funds rate. The consensus is that the PCE and the core PCE, which excludes the more-volatile food and energy components, will show slowdowns in the pace of price growth last month. If this comes to fruition, calls for the Fed to begin loosening monetary policy will build, which could serve as a further catalyst for stocks, especially those in the higher-growth sectors.
Investors also should be aware that trading activity may pick up over the next few trading sessions, as money managers and institutional investors partake in some window dressing as the second quarter and first half of 2024 draws to a conclusion. Window dressing is trading activity that occurs near the end of a quarter or fiscal year that is designed to improve the appearance of a portfolio to be presented to clients or shareholders. A portfolio manager may sell losing positions, so as to display only positions that have gained in value. This may create some volatility in the next few trading sessions.
Speaking of the Federal Reserve, we learned after the close of trading yesterday that the 31 U.S. banks that participated in the latest stress tests would be able to withstand a severe global recession. The report showed that the banks would have enough capital to absorb losses and continue lending during a two-year scenario where the unemployment rate climbs to 10%, commercial real estate prices fall by 40%, and the stock market plunges 55%. Now that these results have been released, the banks can begin determining the scope of their capital allocation to shareholders tomorrow, with the expectation that the stricter regulations in place will only lead to modest increases, if any, to the larger banks’ dividend and share-repurchase policies. – William G. Ferguson
At the time of this article’s writing, the author held positions in none of the companies mentioned.
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