Last Week’s Macro Data:
Headline inflation continued to soften in May as annualized CPI (Consumer Price Index) eased for the eleventh straight month and notched its lowest level since March 2021. Almost all prints cooled from the prior month:
Headline CPI was up 4.0% year over year, coming in slightly below the 4.2% forecast and notably easing from April's 4.9% gain. It increased 0.1% month over month, lower than the predicted 0.2% rise and down from the previous month's 0.4% print.
Core CPI (excluding food and energy) gained 5.3% year over year, slightly exceeding the 5.2% estimate but decreasing from April's 5.5% print. It rose 0.4% month over month, in line with both the consensus and previous month's 0.4% measure.
Inflation also continued to ease in May via PPI (Producer Price Index)as the headline measure fell to its slowest annual pace since December 2020. Almost all readings came in softer than expected:
Headline PPI increased 1.1% year over year, coming in below the 1.5% estimate and cooling from April's 2.3% rise. It was down 0.3% month over month, decreasing more than the predicted 0.1% drop and falling from the previous month's 0.2% gain.
Core PPI (excluding food and energy) rose 2.8% year over year, slightly softer than the 2.9% consensus and declining from April's 3.1% reading. It gained 0.2% month over month, printing in line with expectations but up from the prior month's flat measure.
June manufacturing data was mixed as the Empire State Manufacturing Index improved while the Philadelphia Fed Manufacturing Index contracted:
The Empire State Manufacturing Index registered 6.6, coming in well above the -15.5 consensus and rebounding largely from May’s -31.8. Indicates strengthening in manufacturing activity in New York.
The Philadelphia Fed Manufacturing Index printed -13.7, beating the -14.0 estimate but declining from the previous month’s -10.4 reading. Signals business activity in Philadelphia has deteriorated.
Retail Sales increased 0.3% month over month in May, surpassing the expected 0.2% decrease but below the previous month’s 0.4% rise. Suggests that consumer demand remains resilient.
The Michigan Consumer Sentiment Index (preliminary) came in at 63.9 in June, beating the 60.0 forecast and up from the prior month’s 59.2 print. Indicates consumers are optimistic regarding the health of the economy.
1-year inflation expectations fell to 3.3% from 4.2%, notching the lowest since March 2021. However, 5-year inflation expectations only decreased to 3.0% from 3.1%.
From Earlier This Week:
The below housing data suggests conditions in the housing market are improving:
Building Permits (preliminary) came in at 1,491K in May, beating the 1,405K estimate and increasing from April’s 1,417K. Notches the best print since October 2022.
Housing Starts were 1,631K in May, well above the expected 1,400K and up from the previous month’s 1,340K. Marks the largest since April 2022.
The NAHB Housing Market Index came in at 55 for June, exceeding the predicted 50 and up from the prior month’s 50 print. The index lies at its highest level since July 2022.
Today's Update:
The Chicago Fed National Activity Index registered -0.15 in May, coming in below the 0.15 forecast and falling from April's 0.14 print. Suggests US economic growth has declined relative to the previous month.
The Conference Board Leading Economic Index decreased 0.7% month over month in May, level with the consensus but falling more than April's 0.6% decline. Notches the 14th consecutive monthly decline and continues to signal a negative outlook for the economy.
Existing Home Sales were 4,300K in May, surpassing the 4,250K estimate and up slightly from the prior month’s 4,290K. Signals a strengthening in the housing market.
The Kansas City Fed Manufacturing Index came in at -12 for June, worse than the expected -5 measure and down from the previous month's -1. Indicates weakening factory activity in the Tenth Federal Reserve District.
Additional Content:
A common way to measure market breadth is to compare the performance of the S&P 500’s standard market-cap weighted index and its equal weighted counterpart. Breadth broadens when the S&P 500 Equal-Weight Index outperforms the traditional S&P 500 Index as the number of stocks contributing to return increases when the former outperforms, versus performance driven by fewer stocks due to greater market capitalization. The chart on the left below (includes data through May 31, 2023) suggests that breadth tends to improve as the economy recovers from a downturn. Moreover, the chart on the right shows that the S&P 500 Equal-Weight Index has shown relative outperformance versus the S&P 500 Index thus far in June, with industrials, materials, and financials outperforming this year’s best performing sector, technology. Does this suggest a positive path ahead for equities?
However, Morgan Stanley points out that there is a strong relationship between annualized PPI for Finished Goods and corporate revenues. As inflation eases and this component of PPI declines, it implies that revenue growth will drop in the coming months, squeezing margins and ultimately decreasing earnings.
Through mid-June, a handful of larger stocks that have benefited from AI drove most of the S&P 500’s return in 2023. Excluding those stocks, the index’s price level more accurately reflects the abundance of bearish 2023 year-end forecasts set in December of 2022. Additionally, the forward P/E of the top 50 stocks in the S&P 500 Index, which are likely to be AI-boom driven stocks, has increased 30% since the October 2022 lows, but their forward earnings estimates have remained flat. If the first half of this year’s rally was driven by AI optimism alone, will there be a catalyst for it to continue through the second half of 2023?
Best,
Nick
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