Weekly Review & Outlook: June 3, 2024

Economic growth estimates for 1Q were lowered and further April inflation data was released. Stocks rebounded to finish May higher after the April pullback.

The April Personal Income and Outlays release from BEA (May 31) showed the monthly core Personal Consumption Expenditures (PCE) inflation measure higher by 0.2% from March. This was better than the 0.3% monthly increase in the April Consumer Price Index (CPI) which was released earlier in May. Headline PCE increased 0.3% in April and is higher by 2.7% from a year earlier.

My updated chart for last 6-months annualized core consumer inflation shows the rate well above the Fed’s 2% target rate. These intermediate term rates will likely remain elevated before peaking in June. Easier comparisons should allow the measures to begin to fall in July setting up the first ¼ point cut in Fed policy rate in September.

The Fed futures as measured by the CME FedWatch tool forecast the single September cut as the only reduction in policy rate for 2024. The 5.5% upper bound in Fed policy rate continues to appear severely restrictive when compared to quantitative analysis such as the Taylor Rule which indicates a neutral rate that should be 100 to 175 basis points lower.

BEA also released the 2nd estimate for 1Q24 Gross Domestic Product (GDP) (May 30). While very much a backward looking data point, with markets looking for signs of economic cooling to support less restrictive monetary policy, the reduction in estimated 1Q GDP growth to 1.3% annualized from 1.6% suggest Fed risk management should be moderated somewhat towards softer labor conditions than inflation.

When we switch to back to present conditions, we see the yield curve remains inverted, but the slope is less negative today from the end of March. Yields are increased about 30 basis points across maturities of 2 years and greater. When I add the data from last June, we see rate stability on the short end and less negative inversion for maturities greater than 2 years. My opinion is that the past year of stable short term rates has been very beneficial to banks generally. In investor discussions, banks have described lower funding cost coming on the balance sheet as liquidity added in the first half of 2023 rolls with mix shift from non-interest bearing creating the late cycle pressure. I expect to continue to see the benefits of the calendar rolling forward as long as the rate environment remains stable. Stable funding in the context of a 320 bank group that saw a median quarterly increase in problem loans of just 3% should be very manageable.