Daily market snapshot

• Stocks hold steady after hitting new highs: Equity markets finished little changed on Thursday, with the S&P 500 and Nasdaq in slightly positive territory, while the Dow gave back a little over 60 points. This comes after the S&P 500 closed at a record high above 5,400 on Wednesday, as investors liked what they saw from the latest consumer price inflation report. Technology remains the bright spot, as AI enthusiasm and lower interest rates provide tailwinds to the growth story. The real estate, consumer staples and utility sectors were also among the leaders today, while small-caps and industrials were laggards, likely in response to jobless-claims data that suggested the economy may be headed for slower growth. Yields were down again, with the 10-year rate below 4.3% after starting the week close to 4.5%, with the latest inflation readings dialing back the upward pressure on yields experienced earlier this year. With a lot of employment and inflation data to digest over the past several days, the broader backdrop for markets remains a positive one, but we view Thursday's benign move as simply one that is consistent with the markets catching their breath after reaching new highs this week. *
• Producer prices add to the disinflation story: Inflation data remained in the driver's seat this week, with Thursday morning bringing a fresh look at the producer price index (PPI), a measure of input prices being paid along the supply chain. Consistent with Wednesday's CPI report, the news today was favorable, with PPI outright declining by 0.2% in May compared with April. The year-over-year change was also better than expected, with core PPI (stripping out food and energy) coming in at 2.3%. Core PPI was at 8.6% this time two years ago and at 2.8% this same time in 2023*, so the trend is heading in the right direction and offers additional support to the much-needed outlook for further moderation in consumer prices. We doubt inflation readings will continue in a straight line lower from here, but this week's CPI and PPI data offer encouragement to the positive investor sentiment that has backed the rise in stock prices and decline in interest rates this year.
• Labor-market data continue to signal some emerging softness: Initial jobless claims, a weekly reading that provides a fairly timely look at employment trends, rose to 242,000, the highest reading since August of last year. This is now the fourth straight week of increases, consistent with our view that the labor market, which has been exceptionally tight for the past several years, is showing some signs of softening.  To be clear, we are not approaching worrisome territory. The unemployment rate is just 4%, and the economy continues to add jobs at a monthly rate that demonstrates ongoing hiring demand. Moreover, while initial claims have risen, they've done so from record lows. We think the takeaway is that jobless claims are signaling some further slowdown in the jobs market, which is likely to transpire as we advance, but we continue to be of the view that 1) some loosening of employment conditions is actually needed for inflation to ease further, and 2) even with some additional softening, the labor market will continue to be broadly supportive to consumer spending, driving ongoing economic growth over the balance of 2024.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks and bonds rally in response to lower inflation: Stocks finished higher on Wednesday in response to a lower-than-expected consumer price index (CPI) reading for May and the Fed's decision to leave its policy rate unchanged at 5.25% - 5.50%. The S&P 500 gained 0.9%, while the Nasdaq rose by 1.5%.* From a sector standpoint, technology was the best-performing sector of the S&P 500, rising by 2.5%, and is now higher by nearly 14% over the past month.* Growth-sensitive small-cap stocks also performed well, with the Russell 2000 rising by over 1%, reflecting the risk-on preference from markets today. Bond yields finished the day lower, with the 10-year Treasury yield shedding 0.07 percentage points to 4.33%, while the 2-year Treasury yield declined 0.06 percentage points to 4.77%.* Overseas, Asian markets were mostly lower overnight, while European markets finished higher following the lower-than-expected U.S. inflation reading.
• Inflation lower than expected in May: The May CPI report showed that the trend in inflation remains lower. Headline CPI was unchanged on a month-over-month basis, while core CPI rose by 0.2%, both of which were below expectations.* On a year-over-year basis, core CPI rose by 3.4%, the lowest reading since April 2021.* Services inflation, which has run stubbornly high for much of the past year, posted a modest 0.2% month-over-month gain in May, the lowest since September 2021.* Today's reading provided signs that after a string of higher-than-expected inflation readings to start the year, the trend in inflation remains lower. While the Fed will likely need to see continued progress on inflation in the months ahead, today's inflation reading is another step in the right direction for the Fed to cut rates later this year.  
• Fed holds policy rate, as expected; projections show only one rate cut in 2024: As expected, the Federal Reserve held its policy rate steady at 5.25% - 5.50% in today's meeting. In addition to the interest-rate decision, today's meeting was accompanied by updated Fed economic projections. On the inflation front, Fed projections are for core personal consumption expenditures (PCE) inflation to finish the year at 2.8%, which is higher than the March projection of 2.6%.** Projections for Fed rate cuts in 2024 were reduced from three in March to only one in today's release. While expectations for rate cuts were reduced for this year, projections showed that Fed officials now expect four rate cuts in 2025, up from three in March, and four rate cuts in 2026, leaving the end point in 2026 unchanged from the March forecast. In his press conference, Fed Chair Jerome Powell reiterated the Fed will remain data-dependent and need to see further progress on inflation in the coming months before gaining the confidence needed to begin cutting rates. Chair Powell did, however, reiterate that Fed policymakers are aware of the risks of keeping the policy rate restrictive for too long. Overall, today's meeting signaled that if inflation continues to trend lower in the months ahead, the Fed could have a credible case to begin cutting rates this year. Our expectation is for inflation to continue to trend lower in the months ahead, aided by easing labor-market conditions and moderating economic activity, which could pave the way for one or two rate cuts later this year.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **FOMC Summary of economic projections June 2024}

• Stocks close higher - Major equity indexes closed higher on Tuesday. Small- and mid-cap stocks trailed large-cap stocks*. Sector leadership was narrow, with technology and communication services higher, and with financials, utilities and industrials leading to the downside *. In global markets, Asia was mixed ahead of China inflation released later today and the Bank of Japan's meeting on Friday, while Europe was lower. Bond yields declined, with the 10-year Treasury yield at about 4.39%. The U.S. dollar advanced modestly versus major currencies. In the commodity space, WTI oil and gold traded higher.
• Focus is on the Fed and inflation – The Fed's Open Market Committee (FOMC) meeting for June started today, with the interest-rate decision released tomorrow. The Fed's key interest rate, the fed funds rate, is widely expected to remain unchanged in the 5.25%-5.5% range*. The Fed will also release updated economic projections on Wednesday, providing insight into its expectations for key economic measures over the next few years, including inflation, unemployment, interest rates and GDP growth. Investors will look for any changes from the last release at the March meeting, which showed expectations for three cuts to the fed funds rate for 2024**, while bond markets are pricing in one or two cuts for the year***.
• Consumer price index (CPI) released Wednesday – The CPI report for May will also be released Wednesday, which is expected to show headline inflation unchanged at 3.4%, and core inflation, excluding food and energy, edging down to 3.5% from 3.6% in April*. We believe inflation will continue to moderate in the back half of the year, driven in part by lower shelter inflation and slower wage growth. Government measures of shelter inflation, including CPI and personal consumption expenditures (PCE), are lagging market-based measures, such as Zillow's Observed Rent Index****, which shows housing costs rising at a slower rate. The labor market also shows signs of gradual cooling, as unemployment claims edge higher and job openings trend lower. Continued signs that inflation is moderating should keep the Fed on track to cut rates one or two times later this year, which would be favorable for the economy and markets broadly.

Brian Therien, CFA
Senior Analyst

^{Source: *FactSet **U.S. Federal Reserve ***CME FedWatch Tool ****Zillow}

• Stocks start the week modestly higher – U.S. stock-market indexes closed higher on Monday, as investors await the CPI inflation report for May and the interest-rate decision from the June Federal Reserve meeting, both of which will come on Wednesday. The tech-heavy Nasdaq outpaced the S&P 500 and Dow Jones indexes. Treasury bond yields also continued to climb modestly, with the 10-year Treasury yield up 0.03% to 4.46%, well above its recent lows of 4.27%*. European stocks fell on Monday, as uncertainty around European Parliament elections weighed on market sentiment. Meanwhile, oil prices stabilized, with WTI crude oil up over 3% after falling for the past three weeks*.
• All eyes turn to the Federal Reserve on Wednesday – The June FOMC meeting will occur on Tuesday and Wednesday this week, with an interest-rate decision and Fed Chair Jerome Powell press conference on Wednesday afternoon. We would expect the Fed to keep the fed funds rate steady at 5.25% - 5.5% this meeting, but investors will pay close attention to whether the Fed or Powell have gained confidence that inflation is moving steadily toward their 2.0% target. Data recently have been mixed, with last Friday's nonfarm-jobs report coming in stronger than expected, and wage growth moving higher, up 4.1% year-over-year, versus last month's 3.9%*. Nonetheless, inflation data has been moderating after a string of hotter inflation readings in the first quarter of the year. The Fed will also release a new set of economic projections and "dot plot," which will indicate if the FOMC believes rate cuts are warranted this year. In our view, we believe inflation should moderate further in the back half of the year, and the Fed is likely on track for one or two rate cuts in 2024.
• Consumer price index (CPI) inflation also on Wednesday – The U.S. CPI inflation report for the month of May will also be released on Wednesday this week. Expectations are for headline inflation to remain steady at 3.4% year-over-year, while core inflation (excluding food and energy) is expected to tick lower, to 3.5% versus 3.6% last month*. In our view, inflation should continue to gradually moderate in the back half of the year for two key reasons. First, we believe the shelter and rent components of the CPI should moderate, given that real-time shelter, and rent indexes especially, have moved lower in recent months. And second, we see wage gains easing in the months ahead as the labor market cools, driven by an increasing supply of labor and decreasing demand, as well as lower job openings overall. This gradual move lower in inflation should keep the Fed on pace for its first rate cut in the months ahead, perhaps in the September time frame.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}