Weekly Review & Outlook: June 17, 2024

Inflation cooled in May as the Fed left monetary policy little changed. Treasuries and the broader market rallied with the S&P 500 making a new all-time high. Bank stocks fell staying range bound since December.

The May Consumer Price Index (CPI) release (June 12) showed no increase from April. The core CPI excluding more volatile Food and Energy prices increased 0.2% in the month. The headline number was benefited by a monthly drop in gasoline and other energy commodities. Year over year Energy prices increased +3.7%. Non-housing services such as auto insurance and selected medical costs still showed large monthly increases.

In terms of trailing 6-month annualized rates the 0.2% core CPI increase replaced the 0.3% from last November to halt the 5-month increase in the series which troughed late last year. As the elevated 1Q24 increases drop from the 6-month rate calculation in the 3rd quarter, the rate should fall back below 3%.

The June 12 Federal Open Market Committee (FOMC) policy statement left monetary policy mostly unchanged. The 5.25% to 5.50% policy rate was not changed nor was the $60B monthly Quantitative Tightening pace. The quarterly Summary of Economic Projections (SEP) did adjust. The SEP now projects just a ¼ point cut in the policy rate prior to year end decreasing from the projected -¾ reduction in the policy rate for 2024 in the March SEP. The futures curve immediately before the meeting indicated a -1/2 point reduction making the SEP slightly more hawkish than expectations.

FOMC Chairman Jay Powell’s press conference was mostly unremarkable. Commentary focused on gaining confidence to ease monetary restriction in the context of more balanced risks vis a vis the dual mandate. I thought the most interesting question addressed the varying labor survey results. Powell essentially avoided addressing the more than 2 years of concerning Household Employment Survey data stating (my emphasis), “so, sometimes you can’t reconcile the differences, you just have to have to look at it and try to understand. And that’s why it always makes sense to look at a series, you know, in three, six, and 12 months of things rather than just one report. But you’re right to point to the last report where there were job losses in the household survey, job gains big job gains in the establishment survey. So, I mean, we’re left with ambiguous results, and we have to deal with that uncertainty around data. Nonetheless, the overall picture is one of a strong and gradually cooling, gradually rebalancing labor market. Job openings, while they’ve come way down, are still, you know, greater than the number of unemployed people. The jobs workers’ gap is still a significantly positive number greater than it was before the pandemic. So overall, we’re looking at what was still a very strong labor market, but not the superheated labor market of two years ago, or even one year ago.”

Quickly to close in the banks, headlines about CRE risks are mostly stale and insufficiently detailed. In my opinion, Office CRE is fully priced in to bank equities and the debate should be centered on Multifamily CRE risks. I see bank stocks priced for serious loss content from this asset class over the next 12 months. I present 2 charts from Avison Young which suggest the MF outlook is better than markets are pricing. Contrary to the Office market, I see no demand side drop. Pricing softness in certain cities is from new deliveries which are peaking now with a steep reduction in 2025. The other chart shows out migration cities maintaining the best pricing position (upper right quadrant) against conventional wisdom.