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Monthly Market Update – June 2024

Inflation is finally easing

Good news for consumers: the latest data showed inflation is finally easing, with the Consumer Price Index (CPI) showing a drop in prices for necessities and discretionary items(1). Headline CPI was unchanged in May, marking the tamest reading since mid-2022, while core CPI rose by 0.2%(1). Both measures signal a potential slowing trend(1), which, if sustained, would continue to be welcome news for investors. This easing is attributed to smoother-functioning supply chains, a cooling jobs market, and more stretched consumer budgets. Economists suggest that the reduced inflation in goods is starting to affect services, offering hope for a return to price stability(2). Despite core CPI rising 3.4% year-over-year(1), which was the slowest pace since 2021, the Federal Reserve raised its 2024 inflation expectation to 2.8%(3). Following the CPI release, Federal Reserve officials announced they anticipate a gradual reduction in rates, penciling in one rate cut this year and four in 2025(3).

Cooling labor market

The labor market has been a key component of the inflation environment and has remained resilient despite high interest rates, though it has shown signs of a slow and controlled cooling. In April, the number of job openings in the US dropped to the lowest since 2021, decreasing from 8.36 million to 8.06 million(4). This marked a significant reduction in available jobs compared to those seeking employment, reaching the lowest ratio in almost three years—indicating that the labor market may be gradually slowing. In contrast, jobs substantially rose in May, growing by 272,000(5). Wages also increased, rising 0.4% from April and 4.1% over the last year, raising concerns about the impact on inflation(5). Notably, the unemployment rate rose to 4%, ending over two years of exceptionally low joblessness(5).

While the labor market showed signs of cooling, the US services sector displayed its strongest growth in nine months this May, indicating a rebound in business activity(6). Service providers saw a significant increase in orders(6), in contrast with the manufacturing sector, where orders and production have weakened(7). As a major component of the economy, the resilience of the services sector plays a crucial role in sustaining economic momentum. This strength suggests ongoing demand that could risk keeping upward pressure on prices, possibly presenting further challenges for the Federal Reserve.

Bottom line

As inflationary pressures ease, the Federal Reserve is cautiously balancing rate policies amid mixed economic signals. Engineering a managed slowdown that supports job retention and consumer spending continues to be the Federal Reserve’s primary challenge. The goal of lowering inflation while not quashing economic growth has always been a difficult task, and their job is not yet done. Chair Powell acknowledged modest progress toward 2% inflation yet stressed the need for more robust data prior to any rate cuts. The market is likely to continue to be laser-focused on inflation reports and inflation-adjacent items, such as jobs and consumer spending, and can react quickly, in either direction, if data comes in either better or worse than expected.

(1) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
(2) Source: Bloomberg News
(3) Source: Federal Reserve, https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20240612.pdf
(4) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/jolts.htm
(5) Source: Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm
(6) Source: Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/may/
(7) Source: Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/pmi/may/