Baker Market Update
2024-06-28

Treasury yields fell this morning as an inflation print that hit all its marks bolstered rate cut bets. The news was a welcome antidote to calm markets unnerved by inflation measures in Australia and Canada unexpectedly accelerating this week. Personal Consumption Expenditures (PCE), the Federal Reserve’s favored measure of US inflation, decelerated in May coming in at 0.0% MoM, down from 0.3% in April. That was in line with expectations as was the YoY change, coming in at 2.6%, down from 2.7% in April. The core measure, which strips out volatile food and energy items, also printed in line with expectations at 0.1% MoM and 2.6% YoY, down from 0.2% and 2.8% in April.

The 0.1% MoM increase in Core PCE, which the Fed believes is the best indicator of underlying inflation trends, marks the smallest advance in six months. But on an unrounded basis, Core PCE was actually up only 0.08%, which marks the smallest advance in nearly four years (November 2020). The report was undoubtedly good news for the Fed, showing consumer inflation continuing to move towards its 2% target and building on a series of recent reports that have shown the economy continuing to slow and inflation continuing to trend lower.

Elsewhere in the Bureau of Economic Analysis (BEA)’s Personal Income and Outlays report, we saw Personal Income rise 0.5% (vs. 0.4% estimate) and Personal Spending rise 0.2% (vs. 0.3% estimate). The softer personal spending number suggests that despite stronger than expected income growth, consumers are beginning to reign in spending as the economy cools, unemployment edges higher, high borrowing costs take a toll, and excess savings run dry.

The strength of American consumers, and their willingness to spend despite higher prices and borrowing costs, has been key to the continued strength of the US economy in recent years. A strong labor market has contributed to that strength but so has the ~$2 trillion in excess savings Americans amassed during the pandemic. Those savings are now fully depleted, according to the Federal Reserve Bank of San Francisco, which means the ability of consumers to spend now falls primarily on their income. This, at a time when the pace of hiring has slowed, and the unemployment rate has begun to tick higher. The BEA report has fed funds futures now pricing in a 70% chance of a rate cut in September and nearly 2 full cuts by December.

Earlier in the week we saw both Pending Home Sales and New Home Sales for the month of May decline more than expected. Pending sales fell to the lowest level on record as elevated mortgage rates, low inventory, and high prices discouraged would-be buyers. New sales fell to their slowest pace since November. Affordability remains a problem across the housing market but rising inventory of new homes is helping affordability at the margin. The median sale price of a new home decreased 0.9% from a year ago and the supply of available new homes hit the highest level since 2008.

Despite the fourth of July holiday next week, we will have lots of important data to digest. The first week of the new month will bring several readings on the state of the labor market culminating with the Employment Situation Summary on Friday that will give us the unemployment rate and nonfarm payrolls numbers for the month of June. Have a great weekend and Happy Fourth of July!