Mixed economic data throughout May continued to befuddle investors looking to capitalize on near-term interest-rate cuts.  The odds for a summertime reduction in the Fed Funds rate appear remote now, and the possibility for no rate cuts in 2024 remains real.  The U.S. economy continues to grow, albeit at a more moderate pace, while inflationary pressures remain somewhat sticky.

Unemployment in the U.S. is still sub-4% (April = 3.9%) while the JOLTS (Job Openings) number for March was 8.5 million.  Moreover, wage pressures continue with Average Hourly Earnings up +0.2% MoM (+3.9% YoY) in April.  Initial Jobless Claims have yet to move materially higher, averaging 219k for the month of May.

Consumer Prices edged up +0.3% in April, which translates to a +3.4% rise YoY, measurably higher than the Fed’s stated goal of 2.0% inflation.  Core CPI also rose +0.3% MoM, and is now up +3.6% YoY.   Producer Prices rose a higher than expected +0.5% on the month, but are only up 2.2% YoY (Core PPI was +0.5% MoM and +2.4% YoY).  Consistent with these moves, the PCE Deflator rose +0.3% in April, and is now up +2.7% YoY.  All in all, inflationary pressures have abated from the 2023 highs, yet remain above the Fed’s goal of 2.0%.

The University of Michigan Sentiment index dipped unexpectedly in May, falling from 77.2 to 67.4, while the U. of Michigan 1yr Inflation expectations survey came in higher than forecast at 3.5%.  The longer-term 5-10yr inflation expectations forecast also came in a little higher than anticipated at 3.1%, suggesting consumers expect future inflation to come in markedly higher than over the prior decade.

The U.S. Federal Reserve remains caught in a political pickle, with a reasonably strong U.S. economy, somewhat restrictive monetary policy currently, inflation still above target, and a U.S. election coming in November.  Cutting interest rates will be an increasingly popular campaign slogan as we move through summer, with incumbents everywhere looking for an economic tailwind to carry them through to re-election.  The Fed’s independent status may be sorely tested as Chair Powell surveys the economic landscape over the quarters ahead.  Our guess remains 50/50 that we see an interest rate cut here in 2024, unless we experience a substantial slowdown in the months ahead.

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