When yesterday’s closing bell rang, equity markets once again recorded new highs, with the Russell 1000 up 1.3% over the last five sessions. When factoring in the weekly increase, the year-to-date advance for the benchmark rose to 13.4%. Equity markets could have potentially moved even higher given the report of May’s result for the Consumer Price Index (CPI). The report showed the year-over-year increase in the measure registered 3.3% versus a consensus expectation of 3.4%. This better-than-expected result boosted optimism for future price stability and led investors to push stock prices higher. However, muting the enthusiasm regarding moderating inflation was the Federal Open Market Committee’s (FOMC) post-meeting press release which followed the CPI report. The release revealed that the committee had trimmed the estimated number of cuts to the Fed Funds rate from three to one.
Fixed income markets did not fare as well as equities this week with bonds registering a decline of 0.1%. Directly impacting fixed income returns was the hotter than expected increase in nonfarm payrolls which revealed 272,000 new hires in May. In addition, the average hourly earnings grew 4.1% year-over-year which was higher than the expected increase of 4.0%.
Following last Friday’s payroll and wage reports, the yield on the United States 10-year Treasury issue climbed by 0.17% to 4.5%. This increase reflected investor concerns that ongoing wage inflation would postpone the Fed’s move to cut the Fed Funds rate. The yield fell back to 4.3% after yesterday’s press conference with Fed Chair Powell who disclosed that the FOMC did not even take into consideration any rate increases at their meeting.
The FOMC’s meeting did provide a glimpse into their current thinking as revealed by their dot plot of interest rate expectations and inflation outlook. This thinking led them to leave the Fed Funds rate unchanged from its two-decade high of 5.5%. Inflation remains a focus for the group as one of the largest components of the CPI, shelter cost, recorded a very strong increase of 5.4% over the past year.
While much of the focus this week was on the increase in nonfarm payrolls which counts the number of jobs added, the household employment survey revealed that the unemployment rate ticked up to 4% from the prior month’s reading of 3.9%. The increase ended a 27-month stretch of sub 4% readings, the longest such stretch since the 1960s. The uptick in the rate followed a signal from last week’s job openings report that labor market cooling is underway as the ratio of job vacancies to unemployed persons, a key gauge of labor market tightness, fell to 1.24. This is the lowest level since June 2021 and down from 1.3 in March.
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Sources: BTC Capital Management, ICE BofAML, MSCI, Institute for Supply Management, Bureau of Labor Statistics, Standard & Poors, S&P Global and National Association of Realtors
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