The futures market suggests a positive open to today’s stock trading. Early this morning the Bureau of Economic Analysis (BEA) released important inflation data for the month of May. The personal consumption expenditures (PCE) index, as expected, was flat on a monthly basis, and tamer than the prior read of a 0.3% increase. Year over year, the index posted a 2.6% gain, on a par with economists’ estimate and slower than the April advance of 2.7%. The core PCE, which strips out volatile food and energy pricing, was up 0.1%, month to month, as anticipated and less than the previous step-up of 0.3% (revised). Compared to year-earlier inflation, core PCE rose at a two-tenths more-modest rate of 2.6%, matching the outlook.
Wall Street had been anticipating a continued easing of price momentum for goods and services. The Federal Reserve closely monitors the PCE index in considering its short-term interest-rate-setting policy. Investors are hopeful that the central bank will implement two 25-basis-point cuts in the federal funds rate, now 5.25%-5.50%, by the end of this year. Fed officials are cautioning that just one such cut might be more appropriate. Hints of a weakening of the employment sector have some market pundits calling for a cut as soon as this summer. The Fed next meets July 30-31. Up until recently, the consensus among analysts had been that a reduction in rates wouldn’t come until September at the earliest.
Also prior to today’s trading bell, the BEA announced May data on personal income and personal spending. Monthly income improved a solid 0.5%, two-tenths better than the previous advance. Spending was 0.2% higher, ahead of April’s revised gain of 0.1%. These positive trends don’t appear to be strong enough to derail the favorable progress on inflation. Lower interest rates seem likely before yearend. Reduced Treasury bond rates back this surmise.
As the current week progressed, general share-price momentum firmed. In the first few days of the week, housing data displayed a modicum of softness and consumer confidence slipped. Yesterday, announced initial jobless claims, for the week ended June 22nd, were somewhat better than expected. First-quarter gross domestic product was revised to 1.4%, as was anticipated. Reported durable goods orders were more modest than the month before. Through Thursday’s close, the NASDAQ, Standard & Poor’s 500, and the Dow Jones Industrial Average were up 0.9%, 0.3%, and 0.1%, respectively. The new inflation data should lend additional support today.
Wall Street is rooting for a broadening of favorable stock performance beyond the top technology issues. Over the past few days, there have been signs of such a scenario. Whether this is sustainable will be determined in the weeks ahead. We are cautiously optimistic, given good prospects for near-term corporate earnings.
Still, to yearend, domestic and international politics could weigh on stock-price progress. More specifically, the U.S. presidential election has the potential of resulting in one of two very different economic & social policy courses, and the conflicts between Israel and Hamas and Russia and Ukraine, should they widen, pose a fair degree of geopolitical uncertainty; trade routes are experiencing mounting pressure.
At this juncture, we continue to advise concentrating equities portfolios toward large-cap industry leaders. Diversification, with high-quality bonds and cash instruments, is advisable, as well. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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