Dow dropped 207, decliners over advancers 5-2 & NAZ gained another 47. The MLP index slid back 1 to the high 278s & the REIT index was steady, remaining near 375. Junk bond funds edged higher & Treasuries had modest buying, bringing slightly lower yields (more below). Oil was up pennies in the 78s & gold fell 23 to 2328.
Dow Jones Industrials
A measure of wholesale prices unexpectedly decreased in May, adding another piece of evidence that inflation is pulling back. The producer price index (PPI), a gauge of prices that producers get for their goods & services in the open market, declined 0.2% for the month, the Labor Dept's Bureau of Labor Statistics reported. That reversed a 0.5% increase in Apr & compared with the estimate for a 0.1% rise. Excluding food, energy & trade services, the PPI was unchanged, compared with expectations for a 0.3% increase. On an annual basis, the all-items PPI rose 2.2%. The PPI was held back by a 0.8% decrease in final demand goods prices, which was the largest decline since Oct 2023. Within the category, the energy index tumbled 4.8% & food prices fell 0.1%. On the services side, fuels & lubricants retailing margins surged 12.2%, but that was offset in part by a 4.3% plunge in airline passenger services prices. The release comes a day after the Federal Reserve noted “modest further progress” in bringing inflation back down to its 2% target, but not enough for the central bank to start lowering interest rates. The Fed has held its benchmark borrowing rate of 5.25% - 5.50% since Jul 2023 as it awaits more evidence that inflation is heading back to the central bank’s 2% target.
Wholesale prices unexpectedly fell 0.2% in May
The Federal Reserve projected only 1 rate cut for the remainder of 2024, down from its Mar forecast that called for 3 reductions. The central bank's “terminal rate” for 2024, or the rate at which its benchmark fed funds rate will peak, went up to 5.1%, equivalent to a target range of 5.00% - 5.25%. That means that the Fed is only forecasting 1 qtr-point rate cut from the current target range of 5.25% - 5.50%. The “dot plot,” which indicates how 19 FOMC members, both voters & nonvoters, showed 4 officials in favor of no cuts this year, while 7 members projected 1 reduction. The remaining 8 officials forecast 2 rate cuts for 2024. In Mar, the Fed projected 3 rate cuts this year with the fed funds rate hitting 4.6%. After a cool inflation report yesterday but before the Fed’s new forecast release, traders were pricing in 2 cuts this year. For 2025, the central bank anticipated 4 rate cuts in total or a full percentage point reduction in the benchmark fed funds rate.
Here's the Fed's new rate forecast that's moving the markets
Treasury yields slipped once again after the latest inflation data showed an unexpected drop. The rate on the 10-year Treasury slid around 2 basis points to 4.277% & the benchmark note yield also hit its lowest level since Apr 1, briefly trading at 4.24%. The 2-year Treasury yield also fell 4 basis points at 4.71%. Yields & prices move in opposite directions & 1 basis point is equivalent to 0.01%. The producer price index showed a decline of 0.2% in May. That can be welcome news for investors looking for signs of cooling inflationary pressures. The forecast expected prices to tick up 0.1% in the month. Weekly jobless claims data came in at 242K, well above the 225K forecast. That can offer another positive indicator for those hoping the Federal Reserve has seen enough evidence that elevated interest rates have tightened the economy. These releases come after the Fed yesterday held rates steady at 5.25% - 5.50% & suggested it would lower rates just once later this year, down from 3 rate cuts forecast in Mar. The central bank indicated slight optimism that inflation remains on track to trend back toward the Fed's 2% goal, allowing for some policy loosening over the coming months. “Inflation has eased over the past year but remains elevated,” the post-meeting statement said. “In recent months, there has been modest further progress toward the Committee’s 2 percent inflation objective.”
Treasury yields continue to tumble after PPI fell in May
Stocks opened lower & are continuing to see modest selling (except for tech stocks on NAZ). Investors are adjusting their thinking on future interest rates which are expected to see only modest improvement into next year. Some are finding that sobering.
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