Market Monitor: May Mid-Month Update

Headlines and Highlights
  • Inflation cools again after stalling: Core price growth slowed in April, ending a months-long string of disappointing data and providing hope that inflation is resuming its downward trend. The cooling lowered core inflation in the consumer price index to 3.6% – still higher than desired but down from 3.8% in March to the lowest level since 2021. A separate measure preferred by the Federal Reserve, the personal consumption expenditures price index, is below 3% but also stuck above the Fed’s target. Chair Jerome Powell reiterated that the Fed is prepared to keep interest rates at their current level until there is more evidence inflation is going lower.
  • Retail sales reflect pressure on consumers: U.S. retail sales were flat last month as consumers spent less than expected amid elevated inflation and the highest borrowing rates in decades. Much of the spending was on necessities such as food and gasoline, according to the Commerce Department data. Consumer sentiment as measured separately by a University of Michigan survey declined to a six-month low. Consumer spending accounts for roughly 70% of the economy.
  • Markets snap back after poor April: Signs of further moderation in inflation accelerated a strong rebound across financial markets in the first half of May, erasing losses from the prior month. The S&P 500 gained 5.5% to reach midmonth at a record high, up 11.9% for 2024. Small caps added 6.9% to surge back into positive territory (+4.5%) for the year. U.S. REITs (6.8%), international developed stocks (5.9%) and emerging-markets stocks (5.2%) all upsurged. Bond prices benefited from a sharp decline in yields, which move in the opposite direction.
Chart of Interest

market monitor

Downtrend?: Inflation made a small but meaningful move lower after having stalled near 4%.
Sources: St. Louis Federal Reserve, Altair Advisers

Key Takeaways
  • The Fed will likely hold rates steady at its next meeting on June 12th but is expected to lower them in September, according to futures trading tracked by the CME FedWatch Tool. Traders still expect two rate cuts by year-end.
  • The global economy remains remarkably resilient and inflation is on the decline “almost everywhere,” according to the head of the International Monetary Fund. Kristalina Georgieva cautioned, however, that artificial intelligence is starting to hit the global labor market “like a tsunami” and could have a huge negative impact on job seekers even as it raises productivity.
  • U.S. unemployment (3.9%) remained below 4% in April for a 27th consecutive month, the longest streak since 1968-70. The rate’s stability has surprised economists who had expected higher interest rates to result in more layoffs and job-market turbulence.
  • The U.S. housing market is being constrained by 30-year mortgage rates holding above 7% and the persistence of above-average inflation. Home construction permits have dropped for three straight months, the National Association of Home Builders’ index of housing market conditions is at a four-month low, and builders’ expectations for sales in the next six months tumbled sharply.
  • Business activity grew at a faster rate in the eurozone than in the United States in April for the first time in a year, further evidence that a recovery is under way in Europe. The 20-nation euro area, the world’s third-largest economy by global GDP share after the U.S. and China, logged 0.3% GDP growth in the first quarter after six quarters of stagnant or negative growth.

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