Wentz Weekly: Inflation Narrative Changes Again, Stocks Continue Moving Higher

Wentz Weekly Insights
Inflation Narrative Changes Again, Stocks Continue Moving Higher

All focus for investors last week was on Wednesday with the release of the consumer inflation report and the Fed’s FOMC policy decision and Powell’s comments. Outside of this and AI news, it was a relatively quiet week. It was welcoming results based on the markets 1.6% move higher and the drop in Treasury yields.

The S&P 500 rose 1.58%, with four record highs before a slight decline Friday, and the Nasdaq was up a strong 3.24%, thanks to AI news from Apple, Broadcom, and Adobe. However, as we touched on last week, market breadth is very narrow with a small number of companies driving the performance and we are still not seeing broad participation. The Dow fell 0.54% and the small cap focused Russell 2000 fell 1.01%. At the same time, the equally weighted S&P 500 index fell 0.53%.

Information the markets received last week was enough to reverse the narrative on the path of inflation. There was a lot to like about the data from the consumer price index. The index was unchanged in May, suggesting inflation has cooled significantly, a reversal since the beginning of the year that showed a reacceleration in inflation. There was a 2.0% decline in energy prices, but there was many other categories that saw price declines. Shelter prices, which make up the largest weight in the index, rose 0.4%, which offset some of the declines elsewhere.

And perhaps the more important category which is services prices, were also unchanged in the month. However, they have been running hot since the beginning of the year, with inflation in this category running at a 5.0% 12-month rate. This was very welcomed data, apparent by the 1.1% move higher in stocks at the open and the drop in bond yields (over the increased expectation of rate cuts).

The other big event was the Fed meeting. As widely expected, policy remained unchanged. The policy statement was basically unchanged from its last meeting six weeks ago. This meeting was one of the every two meetings that includes policymakers’ Summary of Economic Projections (SEP), which probably received the most attention and indicated Fed officials see little evidence to cut rates soon.

Policymakers now expect just one rate cut this year, down from the expectation of three rate cuts in the prior SEP (on March 20). In addition, it expects an additional four rate cuts in 2025, down from five in the last projection, and expects the long term policy rate to be at 2.8%, up from 2.6% (the current rate is 5.4%). This tells us they believe the “neutral rate” or the rate that is not restrictive or supportive, is higher than previously thought due to the ongoing strength of the economy. Of the 19 Fed officials, four see no rate cuts this year, up from two in March. At the same time the projections for inflation moved slightly higher for this year and next while the projections for unemployment and GDP (economic growth) were unchanged.

Powell’s press conference reiterated much of what we have heard all year – the Fed is looking for more confidence that inflation is moving “sustainably down” before beginning its rate cut cycle.

On the artificial intelligence front, Apple was the biggest headline last week. In its Worldwide Developer Conference, which was the widely anticipated event where it was expected to announce its plans on AI, it unveiled a new AI platform dubbed Apple Intelligence and partnership with ChatGPT developer OpenAI. Its partnership will allow ChatGPT to be available on Siri and other Apple applications and will be available with an operating system update later this year (for devices iPhone 15 or newer). Apple is hoping this will create a demand and an upgrade cycle for consumers with older devices. As Apple CEO Tim Cook said, “We think Apple Intelligence is going to be indispensable to the products that already play such an integral role in our lives.”

The news was enough to send the stock 8% higher on the week and reclaim its title as the most valuable publicly traded company, after losing it to Microsoft (and it was in fact third on the list after Nvidia as well). Its market cap is now right above $3.3 trillion.

Meanwhile, semiconductor company Broadcom rose to the eighth most valuable company with a market cap of $807 billion, after a 23% gain on the week, after it crushed its earnings expectations and raised its outlook on AI chip revenues. It also announced a 10 for 1 stock split, something that doesn’t change the valuation, but investors tend to like. The company is yet another clear beneficiary to the AI trend.

It will be a more quiet week this week. Data will include updates on the housing market, manufacturing sector, and the May retail sales report, and the other focus will be central bank headlines with comments from Fed speakers, as well as the Bank of England and Swiss National Bank policy decisions. 

Recent Economic Data

• Consumer Price Index: The consumer price index was unchanged in May, after a 0.3% increase in April, coming in slightly lower than the 0.1% increase expected. The index is up 3.3% from a year ago, slowing from the 3.4% pace from April. The lower than expected number was due to a 2.0% decline in energy prices, a 0.5% drop in new vehicle prices, 0.3% decline in apparel, and 0.5% decline in transportation services (due to a decline in airline fares) – one category that has been running hot lately. In fact the transportation category is still up 10.5% over the past year. Excluding the volatile categories of food and energy, consumer prices increased 0.2%, also slightly less than the 0.3% expected. Core consumer prices are still up 3.4% over the past year, slowing from 3.6% in April. The largest category, shelter prices, rose 0.4% in the month for the fourth consecutive month and still up 5.4% over the past year. Other core categories higher included used vehicles rising 0.6%, medical care commodities up 1.3%, and medical services up 0.3%. Perhaps the best news is services prices were unchanged in the month after running hot for the first four months of the year, however, services prices are still up 5.0% over the past year.

• Producer Price Index: The producer price index declined by 0.2% in May, coming after a 0.5% increase in April and much lower than the 0.1% increase expected. The index is up 2.2% over the past year, slowing from April’s 2.3% rate. Again, energy was one of the main reasons as energy prices for producers fell 4.8%, while food prices fell 0.1%. Excluding these two categories, the index was unchanged, but still lower than the 0.3% increase expected. The core index is up 3.2% over the past year, up from 3.1% from April.

• Jobless Claims: The number of jobless claims the week ended June 8 was 242,000, an increase of 13k from the prior week with the four week average increasing to 227,000. This was the highest number of initial claims since last August. The number of continuing claims was 1.820 million, up 30k from the prior week with the four-week average up 8.5k to 1.790 million.

• Consumer Sentiment: The preliminary read of June consumer sentiment had an index level of 65.6 for general conditions, a big disappointment and a drop from 69.1 from May. The current conditions index fell to the weakest since December 2022 at 62.5, down from 69.6 from May. The expectations index was the lowest in six months, dropping to 67.6 down from 68.8 last month. The expectation inflation rate over the next 12 months was 3.3%, unchanged from last month while the longer term inflation expectation was 3.1%, up a tick from 3.0% last month.

Company News

• Apple’s AI Announcement: Apple joined the artificial intelligence race, announcing plans to bring a more personalized version of AI (Apple Intelligence) to its 2.2 billion users. The plan includes a new deal struck with ChatGPT maker OpenAI. System includes a voice assistant empowered with enough personal user information to meaningfully help complete various tasks. This also includes an updated Siri with ChatGPT capabilities, a better understanding of natural language, ability to process contextual information, and take action within apps. Apple is betting this will help spark demand for its next iPhone release.

• GM New Buyback: The board of General Motors have approved a $6 billion share buyback plan. They also announced that their forecasted electric vehicle production was cut to 200,000 from their previous 300,000 forecast. This is possibly due to the $850 million investment into the companies driverless-car division, Cruise.

• Regional Bank Weakness: Last week saw several downgrades to forecasts from regional banks at a financial conference. Keybank said it is seeing softer loan growth as a headwind this quarter which will negatively effect its net interest margin. FifthThird said it is now forecasting stable revenue versus the prior expectation for a small increase due to lighter fees. Huntington said it cut its net interest income guidance for the quarter, mainly due to lower loan growth.

Other News:

• France Politics: French President Emmanuel Macron made an unexpected decision on June 9th when he announced plans to dissolve the National Assembly and hold snap elections, an election called earlier than the current scheduled one, in a two-round poll on June 30th and July 7th. The decision stunned even his own deputies, and left all parties scrambling to book venues, pick candidates, and plan campaigns. He made this decision after last weekend’s European Parliament elections ended in disaster for him with Macron’s party, the Renaissance, only gaining 15% of the vote while the hard right party led by Marine Le Pen, National Rally, took over 31% of the vote. As a result of this decision, France has experienced political drama, turmoil, and multiple protests over the course of the past week with citizens wondering what’s going to happen next. It also resulted in a pullback in the French market and a decline in the euro.

• Investors Turn to Bond Pickers: As of April 30, there has been a $105 billion inflow into actively managed fixed-income funds on a net basis this year. Even though the bond market had its worst performance on record just two years ago in 2022, investors have regained confidence in the market due to the expected rate cuts. These investors are hoping that fixed income managers will be able to anticipate swings in rate expectations pr excel in individual bond selection.

• Trump’s Proposal: Former President Donald Trump offered up a proposal to make workers tips tax-free, in order to raise take-home pay and encourage new businesses and employees to recharacterize taxed wages as untaxed tips. The idea would require approval from Congress and could be challenging for lawmakers to write and for tax authorities to enforce. The proposal would also very likely reduce federal revenue by billions of dollars annually moving forward. Proposal would create a two-tiered labor market where tipped workers would gain a significant advantage over other low wage employees due to avoidance of Social Security, Medicare, and Federal income taxes.

• Biden Agreement with Saudis: Biden Administration is close to finalizing a treaty with Saudi Arabia that would commit the U.S. to help defend them. Part of a long shot deal to encourage diplomatic ties between Riyadh and Israel. Reliant upon Israel’s commitment to a separate Palestinian state and the war in Gaza. Treaty must obtain 2/3rds majority vote in the senate, and in exchange for services, U.S. would be granted access to Saudi territory and airspace to protect U.S. interests and regional partners.