Hope you are all doing well. Shares of semiconductor stocks fell, and several traditionally defensive sectors outperformed. This led to sharply divergent weekly returns across U.S. indexes. The Dow finished 0.6% higher, the NASDAQ dropped 4.6%, and the S&P 500 ended 2.0% lower. Scotland was eliminated from the World Cup this week, meaning their fans, the Tartan Army, will be heading home. I have broken down this week’s update using lyrics from their fight song, “Raise the Banner.”
From the dark into the night, we don’t run; we ignite
The Federal Reserve is taking a more hawkish tone as it gets ready to resume its fight against inflation. Core PCE (the Fed’s preferred gauge of inflation) accelerated to 3.4% year-over-year. This marked its highest level since October 2023. This turnaround breaks a string of early-year reports that had given investors and consumers hope that price pressures were steadily melting away. A mix of geopolitical crises, policy implementation, and stubborn domestic demand reversed the cooler spring trend. The Fed has updated its end-of-year expectations to a median projection of 3.3% for Core PCE. That is well above their official 2% target. Regardless, the economy remains in good shape, with the labor market improving and growth running at solid rates. If oil prices continue to drop, we will start to experience softer inflation. That could very well happen, lessening the pressure on the Fed and other central banks to hike interest rates. We could get a rate cut toward the end of the year in that scenario. However, that is not what markets are currently pricing in.
Tonight we rise
The U.S. government’s updated estimate of first-quarter economic growth. GDP expanded at a 2.1% annual rate, up from an earlier estimate of 1.6%. The Commerce Department said its third and final update largely reflected a downward revision to imports, which subtract from GDP. That change offset the negative impact from weakening U.S. consumer spending. I expect consumer spending to weaken further this current quarter. However, I think the economy will continue to expand even with a more cautious consumer. The good news is sentiment is finally starting to improve. U.S. consumers are becoming more optimistic as gasoline prices moderate. The University of Michigan’s Consumer Sentiment survey snapped a three-month streak of declines. In May, sentiment was at record lows. Sentiment rose to a final June reading of 49.5 from May’s 44.8 figure. Consumers’ long-run inflation expectations fell to 3.3% in June from 3.9% in May.
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