US Inflation and Consumer Spending Cool

For the week ending 28 June 2024

Global equities were modestly higher on the week with the S&P 500 trading at a fresh intraday record on Friday morning while the yield on the US 10-year Treasury note was little changed at 4.26%. The price of a barrel of West Texas intermediate crude oil edged up $0.50 to $81.80. Volatility, as measured by the Cboe Volatility Index (VIX), declined to 12.3 from 13.6.

MACRO NEWS

 US inflation continues to cool

The core personal consumption expenditures price index, the measure targeted by the US Federal Reserve, rose just 0.1% from the month before in May, though April’s reading was revised up to 0.3% from 0.2%. On a year-over-year basis, the index rose 2.6%, down from April’s 2.8% rate. Personal income rose a robust 0.5% last month, though spending was subdued, rising 0.2%. Spending growth in April was revised down to 0.1%. The combination of muted inflation and spending sent bond yields slightly lower on Friday morning.

Final Q1 US GDP revision suggests consumption slowing

Investors got the third and final reading of Q1 US gross domestic product on Thursday. While headline GDP was revised up 0.1% to a 1.4% annual rate, the closely-watched personal consumption component was revised down to 1.5%, having initially been reported at 2.5%. The revisions suggest that the consumer may be starting to feel economic headwinds. Final sales to domestic purchasers remained solid at 2.6%, though revised down from an initial 3.1% reading. Combined with Friday morning’s personal income and spending figures, the data suggest a modest consumer-led slowdown is unfolding just as the Fed intends as it seeks to control inflation.

Biden stumbles while sparing with Trump

In a debate light on policy and heavy on generalities, the focus became one of style over substance. The campaign of President Joe Biden had hoped Thursday night’s encounter would put to bed concerns over the president’s age and mental acuity. However, Biden’s uneven performance did anything but, producing Friday morning’s headlines: “Democrats Discuss Replacing Biden on Ticket.” Prediction and betting markets broke decidedly in favor of former President Donald Trump during the debate, while plummeting for Biden. 

First round of French election Sunday

A right-wing bloc led by the National Rally party is expected to receive the most votes in Sunday’s first round of French parliamentary elections. However, France’s two-round voting system makes forecasting seat composition difficult. Heading into the voting, a newly-formed left-leaning bloc, the New Popular Front (NFP) appear to be fracturing, making the outcome even more uncertain. Former French President François Hollande, running as a member of the NFP, indicated he’d be ready to try and assemble a national unity government if elections deliver a hung parliament. French President Emmanuel Macron warned this week that extreme opposition parties could cause civil war.

Fewer, larger takeovers in early 2024

Global mergers and acquisitions hit $1.5 trillion in the first half of 2024 as a surge in US takeovers and an uptick in large mergers offset a decline in the overall number of deals. The value of deals inked rose 22% from a year earlier, according to data compiled by the London Stock Exchange Group, but the total number of deals fell 25%, with acquisitions worth $500 million or less falling 13% by value.

Yen continues its slide

The yen fell to its lowest level since 1986 this week, prompting officials from Japan’s Ministry of Finance to threaten intervention, which it last undertook in late April and early May. USD/JPY rose as high as 161.27 on Friday morning in Tokyo. The minutes of the June Bank of Japan meeting released this week suggest that a rate hike could come as soon as the central bank’s next meeting on 31 July amid rising import prices as yen weakness contributes to inflation. Inflation expectations in Japan have reached their highest level in 20 years, as measured by the breakeven yield on a 10-year inflation-linked security, rising to just shy of 1.6%.

QUICK HITS

The Fed reported on Wednesday that the 31 largest US banks, those with assets exceeding $100 billion, passed their annual stress tests. In a hypothetical recession, the common equity tier 1 capital ratio for the group as a whole would bottom out at 9.9%, well above the 4.5% minimum requirement, the Fed said. The conditions of this year’s test for a severe global recession included a 40% decline in commercial real estate prices, a substantial increase in office vacancies, and a 36% decline in house prices. The unemployment rate for the test rose nearly 6.5 percentage points to a peak of 10%, and economic output declines commensurately.

The US Supreme Court ruled Thursday that the Securities and Exchange Commission can no longer bring fraud causes before internal administrative law tribunals. The court held that people charged with fraud that is punishable by a civil fine have the right to a jury trial in federal court.

Japanese retail sales beat expectations in May, rising 3% year over year against expectations for a 2% rise led by demand for autos.

US new home sales fell 11.3% month over month in May to a 619,000 annual rate. That follows three straight months of declining existing home sales. Meanwhile, pending home sales fell 2.1% month over month. Amid high prices and mortgage rates, inventories of unsold new homes have risen to the highest levels since 2008.

Upside inflation surprises in Canada and Australia have investors questioning whether the global disinflationary trend has stalled. Consumer prices in Cananda unexpectedly rose to 2.9% year over year in May from 2.7% and to 4% from 3.8% in Australia.

Dutch Prime Minister Mark Rutte was named the next Secretary General of NATO and will succeed Norway’s Jens Stoltenberg on 1 October.

US durable goods orders rose a preliminary 0.1% in May, beating forecasts for a 0.5% decline. However, April goods orders were revised down to 0.2% from 0.6%. Non-defense capital goods orders ex aircraft were weaker than expected, falling 0.5%.

Two US federal courts on Monday blocked parts of US President Joe Biden’s student loan repayment plan.

The Swiss National Bank appointed Vice Chair Martin Schlegel to replace Thomas Jordan as the central bank’s chair, beginning October 1.

Michele Bowman, the Fed’s most hawkish member, says she doesn’t project any interest rate cuts this year.

Canada began the process of imposing tariffs on imports of Chinese electric vehicles.

GDP in the United Kingdom grew 0.7% in the first quarter of the year, revised data released Friday showed. That’s up from a first estimate that the economy grew 0.6%, the fastest Q1 growth of any G7 country.

The International Monetary Fund said on Thursday that the US economy is robust, dynamic and adaptable but warned that there is a pressing need to reverse the ongoing increase in the public debt-GDP ratio and that chronic fiscal deficits represent a significant and persistent policy misalignment that needs to be urgently addressed.

On Thursday, EU leaders endorsed Ursula von der Leyen to serve a second term as the president of the European Commission. The nomination now moves to a vote in the European Parliament.

THE WEEK AHEAD

The first round of French parliamentary elections are on Sunday while the general election in the UK takes place on Thursday, with the Labour Party expected to secure a large majority in parliament. Manufacturing purchasing managers’ indices will be released on Monday, with service sector PMIs to follow on Wednesday. Eurozone CPI data are due Tuesday. US markets are closed Thursday for Independence Day. The June US employment report will be released Friday.