The U.S. economy continued to defy skeptics as well as conventional bond market wisdom concerning the slope of the yield curve. Despite a historically steep inversion, signaling imminent recession, the third reading for Q1 US GDP showed a better than anticipated +2.0% annual growth rate. The only challenge to the “no-landing” thesis may lie in leadings indicators, which continue to weaken. The Conference Board’s Leading Economic Index for the U.S. declined by -0.7% in May, the 14th consecutive month of decline. Consumer expectations, new orders indices and worsening credit conditions all contributed to the decline.
A bright spot here in the U.S. remains the labor market. The Unemployment Rate for May edged higher to 3.7%, however a better than expected 339k jobs were created. Average Hourly Earnings ticked up by +0.3% (+4.3% YoY) while Average Weekly Hours held steady at 34.3. Initial Jobless Claims averaged 249k over the past 4 weeks and have yet to signal near-term weakness for the labor market.
Inflationary pressures remained somewhat sticky in June, with CPI for May showing a meager +0.1% uptick and core CPI a more robust +0.4% rise. Producer Prices, however, fell more than expected, dropping -0.3% for the month, and up just +1.1% YoY. Core PPI edged higher by +0.2 MoM and +2.8% YoY. The PCE Core Deflator reading for May showed a +0.3% increase (+4.6% YoY). While prices for goods continue to fall, service price inflation remains problematic and could trigger further monetary tightening from the Federal Reserve.
The Federal Reserve opted for a pause at its June FOMC meeting, citing the lag effects of monetary policy. Chair Powell did indicate, however, that future rate hikes were likely and that the battle against inflation is still being waged. Markets are currently pricing in a 85% chance of a 25 basis point hike at the July 26 FOMC meeting, while the Dot Plot from the recent meeting suggested a terminal Funds rate of 5.50% to 5.75% by year-end. The bond market continues to price in future rate cuts, however, with the 10-year yield still below 4%. Time will tell if Mr. Market knows something we don’t.
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