Inflation Declining, Fed Pauses (June 16 Market Recap)

June 16, 2023

Inflation Declining, Fed Pauses (June 16 Market Recap)

Indices

Dow 34,299, +422 or +1.25%.
Nasdaq 13,689, +430 or +3.24%.
MSCI EAFE 2,161.49, +51.04 or +2.42%.
S&P 4,409, +111 or +2.58%.
USD10Y 3.769%, +2.4bp or +0.64%.
WTI Crude $71.44 bbl, +1.27 or +1.81%.

Inflation Declining

On Tuesday, the Consumer Price Index dropped dramatically from +4.9% in May to +4.0% in June, a two-year low. Core CPI dropped as well, albeit not as dramatically, from +5.5% to +5.3%. On Wednesday, Wholesale Prices, the Producer Price Index (PPI) was even better, notching an increase of just +1.1% year over year, its lowest level since December of 2020.

Fed Pauses

As was expected and almost guaranteed after Tuesday’s inflation data, the Fed did not raise rates for this meeting, leaving the discount rate unchanged at 5% – 5.25%. However, there was a bit of a surprise in their statement and the Fed dot chart which revealed that the FOMC expects not one but two more 25bp increases prior to the end of the year. That rattled markets quite a bit until Fed Chairman Powell’s news conference and his answers to the press’ questions which seemed to indicate that two more rate hikes were not yet a certainty and that the Fed would continue to base their decisions on real time data.

Next Week

It is an extremely light week of economic data next week sprinkled with a few speeches from Fed officials.

Economic Calendar

Monday – Markets Closed in Observance of Juneteenth.
Tuesday – N/A.
Wednesday – N/A.
Thursday – Initial Jobless Claims. May Leading Economic Indicators.
Friday – June Flash U.S. Manufacturing and Services PMI.

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June 16 Daily Trading Recap…

Monday – Dow +189 to 34,066, Nasdaq +202 to 13,461, S&P +40 to 4,338, USD10Y +2.0bp to 3.765%.

Nine of eleven S&P sectors traded higher, led lower by Technology, Consumer Discretionary, and Communication Services.
Oracle beat top and bottom-line estimates and is trading up 5% post close.

Tuesday – Dow +145 to 34,212, Nasdaq +111 to 13,573, S&P +30 to 4,369, USD10Y +7.4bp to 3.839%.

Ten of eleven S&P sectors traded higher, led by Materials, Industrials, and Consumer Discretionary
May Headline Month Over Month CPI was in-line with expectations, up +0.1%. Year over Year Headline CPI fell to a two-year low at +4.0 vs +4.9% last month.
May Core CPI (excluding food and energy) was also in-line with expectations at +0.4%. Year Over Year Core CPI declined as expected, to +5.3% vs +5.5% last month.
After the release of the CPI data, the Fed Watch Tool measuring the probability of a pause when the Fed releases their interest rate decision tomorrow surged to 94.2% vs 79.1% yesterday. Meanwhile, the odds for a 25bp hike at the next Fed meeting, July 26, ticked up slightly to 60.6% vs 59.9% yesterday.

Wednesday – Dow -232 to 33,979, Nasdaq +53 to 13,626, S&P +3 to 4,372, USD10Y –4.3bp to 3.796%

Seven of eleven S&P sectors traded down, led lower by Health Care, Energy, and Materials.
Headline May Wholesale Prices (Producer Price Index) declined significantly month over month by –0.3% vs expectations of a –0.1% decline. That resulted in headline year over year PPI falling to +1.1%, the lowest since December of 2020.
Core PPI was flat month over month and the year over year number fell to +2.8% vs +3.3% a month ago.
The Federal Reserve paused their rate hike cycle although in their written statement and in comments to the press afterwards was hawkish language of possibly two more 25bp rate hikes as opposed to the conventional wisdom that the Fed would only raise once more. Markets fell on the release of the written statement but rebounded during Chair Powell’s press conference.

Thursday – Dow +212 to 34,191, Nasdaq -30 to 13,596, S&P +21 to 4,393, USD10Y –6.8bp to 3.728%.

Jobless claims were 262,000 vs the 250,000 forecast and last week’s slightly revised higher print of 262,000 (vs 261,000 originally).
May Retail Sales were up +0.3% vs expectations of a decline of –0.2% and vs last month’s +0.4% print.
June Empire State Manufacturing beat at +6.6 vs –16.0 and last month’s -31.8 print.
June Philadelphia Fed Manufacturing Survey beat but was still weak at –13.7 vs expectations of –14.8 and last month’s -10.4 print.

Friday – Dow –108 to 34,299, Nasdaq –93 to 13,689, S&P –16 to 4,409, USD10Y +4.1bp to 3.769%.

Eight of eleven S&P sectors traded down today, led by Communication Services, Technology, and Financials.
Fed policymakers continued to speak in a hawkish manner as Fed Governor Waller warned that core inflation is not declining as fast as he thought it would and Richmond Fed President Barkin said he was comfortable with further rate increases.
Initial June University of Michigan 12-mionth inflation expectations fell considerably to +3.3%, down from May’s +4.2% and expectations of +4.4%.
June Consumer Sentiment rose to 63.9 vs expectations of 60.8 and last month’s 59.2 print.

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