Dear Friends,
Over the past couple of years, the Federal Reserve Board has repeatedly emphasized that future policy is data-dependent, and two important data points were recently released which will be carefully examined by the Fed ahead of their next meeting. The first is the Fed’s favored inflation gauge, Personal Consumption Expenditures Price Index (PCE) which showed a continued slowing of inflation. PCE measures the average price increase for goods and services purchased by US households. Compared with the standard Consumer Price Index (CPI), PCE includes a broader subset of goods and services prices, as well as spending from both rural and urban consumers. Another significant update came by way of US job data which was released today and provides further evidence that the labor market appears to have come into better balance. Find out more about what is driving the markets in this week’s newsletter.
Economy, Geopolitics, and Commodities
1. The U.S. added 206,000 Jobs in June as Hiring Stays Strong
The Labor Department reported on Friday that the U.S. added 206,000 jobs last month, slightly beating expectations. But the unemployment rate ticked up to 4.1%, a sign of slack in a labor market that has been remarkably strong even in the face of high interest rates. There were other signs as well that the job market continues to cool. Average hourly earnings were up 3.9% in June from a year earlier, marking their smallest gain since 2021. The jobs counts for both April and May were revised lower. The labor force participation rate, the share of working-age people who were employed or seeking work, ticked up—an indication that more people are entering the labor market.
For the Federal Reserve, Friday’s report provides further evidence that the labor market appears to have come into better balance. A hot labor market makes it more difficult to lower rates, while the central bank is also mandated to keep the job market as strong as possible without triggering inflation. The unemployment rate has risen from the multidecade low of 3.4% it hit early last year. Fed officials have become less worried about the job market overheating and anticipate lowering interest rates later this year so long as inflation doesn’t flare up. Still, robust job growth does make them feel they can be more patient before cutting rates. “Frankly, because the U.S. economy is strong and the labor market is strong, we have the ability to take our time and get this right,” Fed Chair Jerome Powell said Tuesday on a panel with other central bankers at a conference in Portugal. 1
2. Fed’s Favored Inflation Gauge Slows
The Federal Reserve’s preferred measure of underlying US inflation decelerated in May, bolstering the case for lower interest rates later this year. At the same time, household spending rebounded after a pullback in April, and incomes showed solid growth, offering some hope that price pressures can be tamed without lasting damage to consumers. The so-called core personal consumption expenditures price index, which strips out volatile food and energy items, increased 0.1% from the prior month, according to Bureau of Economic Analysis data out last Friday. That marked the smallest advance in six months. On a two-decimal basis, it was up just 0.08%, the least since late 2020.
Inflation-adjusted consumer spending growth was driven by goods and fueled in part by the jump in incomes. The combination of slower price increases and robust spending offers some relief for Fed officials after an array of reports earlier this week pointed to a loss of economic momentum. Central bankers pay close attention to services inflation excluding housing and energy, which tends to be stickier. That metric increased 0.1% in May from the prior month, according to the BEA, the least since October.2
3. Euro Zone Inflation Eases to 2.5% as Core Print Misses Estimate
Headline inflation in the euro area dipped to 2.5% in June, the European Union’s statistics agency said Tuesday, while the closely watched core and services prints held steady. The headline figure was in line with the expectations of economists polled by Reuters. Inflation had nudged up from 2.4% in April to 2.6% in May. Core inflation, excluding the volatile effects of energy, food, alcohol and tobacco, stayed at 2.9% from the prior month, narrowly missing the 2.8% economists had forecast. The rate of price rises in services also failed to budge, holding at 4.1%.
Investors will now parse what the latest data means for the trajectory of interest rates in the 20-nation euro zone, following the European Central Bank’s initial 25 basis point cut in June. Volatility in the consumer price index has long been expected this year, as choppy base effects from the energy market unwind. In June, year-on-year energy inflation in the euro zone was 0.2%, a sharp switch from earlier in the year when the sector had a strong disinflationary pull. Money markets see a high likelihood of another two interest rate trims of 25 basis points each across the ECB’s remaining four meetings this year, according to LSEG pricing data. They price only a 33% chance of a follow-up cut this month. The euro, which has struggled in recent weeks under the shadow of political risk from the upcoming French elections, was slightly lower following the data release.3
4. U.K.’s Labour Party Wins Election Landslide
Britain’s Labour Party won a landslide election victory as voters handed its leader Keir Starmer one of the biggest parliamentary majorities in British history, placing a center-left government into Downing Street for the first time in 14 years. With almost all districts counted, Labour had won 412 of the 650 seats in Parliament. The ruling Conservative Party had secured 121 seats, the worst result in its 190-year history and a massive reversal from its victory in the last election in 2019.
After meeting with King Charles III and officially being named prime minister, Starmer addressed the nation from Downing Street. He promised to fix Britain but warned it could take time. “With respect and humility I invite you all to join this government of service, in the mission of national renewal,” he said. “Our work is urgent and we begin it today.” A strong showing by a handful of smaller parties, meanwhile, indicated voter discontent with mainstream politicians. Thursday’s election was a particularly heavy repudiation of former Prime Minister Rishi Sunak’s Conservative Party, which was in power during a tumultuous decade in British politics that included Britain’s departure from the European Union, political infighting, scandals and a run of four prime ministers in five years. The scale of the defeat eclipsed the Tories’ 1906 result of 156 seats.1
4. Germany Set to Overhaul Subsidy Regime for Renewable Energy
Germany’s coalition government is set to overhaul the way renewable energy is subsidized so that power producers would get one-off support for their investment costs instead of a guaranteed price for power they produce, a finance ministry document showed on Friday.
A shift to investment subsidies would mark a significant change in Germany’s renewables market and would seek to make the industry less dependent on government support. It means operators would receive a one-time grant to build renewable plants but they would need to sell their electricity based on their own market calculations, bearing significantly higher financial risks. The current subsidy regime, introduced some 24 years ago, has made it easier for companies to make investment decisions and to secure favorable loans. The 20-year guaranteed price for solar, wind and biogas energy producers selling their power into the grid has boosted Germany’s renewables expansion as Berlin aims to cover 80% of its electricity needs with renewable energy by 2030. The planned reforms, whose exact timeline has not yet been specified, are part of a government goal to expand renewable energy in the future without subsidies, and to fully integrate renewables into the market, the document showed.4
Financial Markets
1. S&P 500, Nasdaq Post Record Closes Friday
The S&P 500 rose to a new high on Friday, putting the broad-market index on track for a weekly gain during the holiday-shortened trading week. The tech-heavy Nasdaq Composite also hit a new high. The S&P 500 traded higher by about 0.5% on Friday, while the Nasdaq Composite gained 0.8%. The Dow Jones Industrial Average added nearly 0.2%. The S&P 500′s rally this year has grown to roughly 16%, with the benchmark on pace for its fourth positive week in the last five as investors bet that any economic weakness later this year will be met with a Federal Reserve rate cut. The Nasdaq’s year-to-date gain is 22%.
Widely monitored labor data released Friday morning reflected a 206,000 increase in nonfarm payrolls in June, but a slight uptick in the unemployment rate, which rose to 4.1%. Economists expected the jobless rate to remain steady at 4%. Treasury yields fell following the report on expectations the uptick in unemployment would spur the Fed to cut interest rates later this year. Investors hiked their bets on a September interest rate cut, with odds of a quarter-point cut increasing to about 77%, up from 64% a week ago, according to the CME Group’s FedWatch Tool.3
2. Nvidia Gets Rare Downgrade as Analyst Warns of Future Upside
Nvidia Corp.’s breakneck rally since the start of last year has finally run out of room to push higher, according to New Street Research analyst Pierre Ferragu. Ferragu downgraded the AI-focused chipmaker to neutral from buy, writing that the stock is “getting fully valued” after soaring 157% this year, on top of a gain of almost 240% in 2023. Shares fell 0.6% on Friday, compared with a gain of 1% for the Nasdaq 100 Index.
Nvidia is the second-best performer among S&P 500 components this year, behind Super Micro Computer Inc, another favorite among AI investors. The climb has added $1.9 trillion to Nvidia’s market capitalization, and briefly resulted in it attaining the title of the world’s largest company. Analyst downgrades are rare for a company that has become the biggest beneficiary of the artificial intelligence spending boom. Nearly 90% of the analysts tracked by Bloomberg recommend buying the stock. However, valuation is often cited as a concern. Nvidia trades at nearly 23 times estimated revenue for the next 12 months, making it the most expensive stock in the S&P 500 Index by this measure.2
3. Costco and Sam’s Club Aisles Are Full of Gen Z Shoppers
Young adults are battling sticker shock at the grocery store by supersizing their groceries. They are turning to bulk purchases, splitting their food costs with friends, roommates, family and neighbors. Shoppers in their 20s and 30s are trying to fight higher prices by joining warehouse-store giants such as Costco and Sam’s Club. Generation Z shoppers represent the fastest-growing member group at Walmart-owned Sam’s Club, a spokeswoman says. Memberships for shoppers ages 27 and under rose 63% over the past two fiscal years. Gen Z and millennials—customers 28 to 43—now make up a quarter of Sam’s Club members.
Food prices might be rising more slowly than their 2022 and 2023 peaks. But the lingering effect of that inflation is that Americans spend an average of 11.2% of their disposable personal income on food, a number approaching highs not seen in three decades, according to the most recent Agriculture Department data. The retailers don’t love membership sharing. Costco has on-site ID checks, and both Costco and Sam’s Club limit members to two guests per visit. But both have reported net sales increases this year. Nearly 128 million people held Costco cards as of 2023, the company said in December, with membership fees running between $60 and $120. Sam’s Club members pay between $50 and $110 yearly.1
4. Ford Sales Edge 1% Higher in the Second Quarter, Led by Trucks
Ford sales rose 1% during the second quarter over the year-earlier period, led by a 5% gain in truck sales, the automaker said Wednesday. Ford truck sales, which include pickups and vans, totaled 308,920 vehicles during the period, the company’s best second-quarter performance for the category since 2019, Ford said. Sales in its F-Series totaled 199,463 vehicles. Sales of Ford electric vehicles totaled 23,957 during the second quarter, up 61%. The automaker said its EVs, in particular the Mustang Mach-E and F-150 Lightning, are drawing new customers to the company.
Meanwhile, sales of hybrid vehicles totaled 53,822, an increase of 56% and a new quarterly sales record for Ford since it began offering hybrid models more than 20 years ago, it said. Automakers including Ford have been leaning on hybrids to ease the EV transition and help achieve tightening federal fuel efficiency standards. The update comes a day after Ford’s crosstown rival General Motors reported second-quarter sales that rose 0.6% from a year earlier. GM said total sales of 696,086 made for its highest quarterly sales mark since the fourth quarter of 2020. Even modest sales increases for both Ford and GM outpace expectations for the overall market. Auto industry forecasters including Cox Automotive and Edmunds expect second-quarter sales industrywide to be roughly flat year over year.3
5. Wall Street Sees Dollar Regaining Strength After This Week’s Dip
The US dollar’s first weekly loss in more than a month is probably a temporary setback, according to currency strategists, as political and inflation risks come back into focus. The Bloomberg Dollar Spot Index extended a decline on Friday, pulling further away from last week’s year-to-date high, amid weakness in US economic data. The drop comes as political developments in the UK and France support gains for the pound and the euro against the greenback.
Even the Japanese yen was slightly stronger against the dollar in Friday trading, though the currency remains at depressed levels that market participants are watching in case authorities decide to intervene and prop up the currency. Bloomberg’s dollar gauge declined as much as 0.3% on Friday before paring most of its losses. The low was reached after June employment data showed slower hiring and wage growth that reinforced expectations for Federal Reserve interest-rate cuts beginning this year. The dollar has strengthened against the euro this year as the European Central Bank moved toward cutting interest rates for the first time in years last month. By contrast, the Fed had adopted an increasingly cautious stance amid halting progress toward slower inflation.2
Sources:
(1) www.wsj.com
(2) www.bloomberg.com
(3) www.cnbc.com
(4) www.reuters.com
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