Market Commentary June 2024
E-Quarterly Newsletter - June 2024
By Brian Johnson, Director of Investment Services
If you’re a fan of roller coasters, you’ve likely enjoyed the past few months as the market seemingly can’t decide how many times the Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) might reduce its target range for the federal funds rate in 2024, if at all. The market was expecting as many as six quarter-point cuts to the federal funds rate at the beginning of this year, but those expectations have recently shifted to align more closely with guidance of the voting members of the FOMC.
At their most recent meeting that concluded June 12, 2024, the FOMC held the federal funds rate steady at a target range of 5.25% – 5.50%. Based on respective forecasts of the FOMC membership, only one full 25-basis point rate cut is projected for 2024. That number is down from the March forecast that called for three quarter-point reductions this calendar year.
Over the past several years, the Fed and its Chair, Jerome Powell, have emphasized they will be “data dependent” in assessing future policy and rate decisions, and that rhetoric prevailed at this last meeting. As a reminder, the Fed operates under a dual mandate of achieving price stability and maintaining full employment (whatever that might mean).
At his press conference following the meeting, Powell stated that “we’re looking for something that gives us confidence that inflation is moving sustainably down.” While inflation has proven to be sticky, various measures are beginning to show signs of cooling. The Consumer Price Index (CPI) for May showed no increase, after posting increases between 0.3% and 0.4% during the first few months of the year. Meanwhile, the Fed’s preferred measure of inflation, the Price Deflator for Personal Consumption Expenditures (PCE Deflator) index, came in as expected in April, rising at 0.3%, the slowest pace since December of 2023.
The commentary in the FOMC announcement and from Chair Powell seemed to please the markets, as both the equity and bond markets rallied significantly following the meeting. The S&P 500 gained 0.9% during trading on June 12th, pushing it to an all-time high. Meanwhile, the U.S. Treasury market showed meaningful price improvements with rates declining across the maturity spectrum (yields move inversely to prices). U.S. Treasuries in the 1-year and 2-year range fell between 5 and 6 basis points, while longer tenors, such as the 5-year, dropped 10 basis points. As of the filing of this article for publication, the benchmark 10-year U.S. Treasury was trading at 4.25%, down roughly 35-basis points from recent its recent high of approximately 4.60%.
While inflation reveals signs of cooling, Powell’s comments made it clear that the Fed wants to see more than just one or two positive inflation readings before reducing the policy rate. It’s also worth noting that May’s year-over-year CPI increase was 3.3% and April’s year-over-year PCE increase was 2.7%, both above the Fed’s 2.0% target. As the market continues to parse through economic data to determine the Fed’s next move, paying close attention to future CPI and PCE readings will be important to gauge how inflationary pressures are impacting both the economy and policy prerogatives.
Regarding the other side of the Fed’s dual mandate, recent economic releases around employment have been a bit of a mixed bag. May’s nonfarm payrolls number rose by 272,000 for the month, significantly outpacing the estimate of 190,000 and the 175,000 jobs created in April. Interestingly, even with the large jobs increase in May, the unemployment rate ticked up to 4%, ending the longest stretch of unemployment below 4% since the 1960’s.
From a global monetary policy perspective, May’s economic data and the FOMC’s June meeting came on the heels of two other central banks recently lowering their benchmark policy rate. Both the Bank of Canada and European Central Bank (ECB) lowered their target rate by 25 basis points during the first week of June. Each chose to cut its policy rate, even with inflation remaining above respective targets. The U.S. is in a much different position than those economies, but those moves bare monitoring as these are the first two G7 central banks to lower their overnight rate in the face of inflation persisting above stated objectives.
Following the FOMC meeting, the CME’s FedWatch Tool is pricing in a 61% probability of a 25-basis point rate cut at the September meeting and a 49% probability that a quarter-point cut comes at the November meeting. Based on the probabilities for the December FOMC meeting, the market is currently settled on a coin flip’s chance of 50 basis points of cuts through the end of the calendar year.
If we’re indeed on the horizon of a rate-cutting cycle, we believe developing a long-term strategy for income-producing investment portfolios is becoming more important than ever. Public funds investors have been able to ride the “liquidity wave” over the past couple of years, with government money market funds and Local Government Investment Pools (LGIPs) offering yields well above 5%. Because those yields are tied directly to the federal funds rate, cash-like instrument returns will begin to decline if the Fed starts cutting later this year. Most money-fund portfolios have weighted average maturities of 60 days or less, meaning there will be some lag in reduced income from those products, but not much. Developing a diversified portfolio may be a prudent way to generate stable portfolio income, while maintaining the ability to weather different interest rate cycles. If you’re interested in discussing different fixed-income portfolio strategies, please contact your Ehlers Investment Adviser. We are always happy to help!
Check out the 6/21/24 Issuer & Investor Update!
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