6/14/24 – Bond market reads data as dovish, FOMC projects higher for longer
The consumer price index (CPI) for May was released Wednesday, the morning of the FOMC meeting. The one-month change to the index was 0.0% and the headline year-over-year index rose 3.3%, a 0.1% improvement over last month’s reading. Investors interpreted the change as a big step in the right direction and rallied stocks and bonds, pushing the yield curve down to recent lows and the S&P 500 to a fresh all-time high.
The FOMC meeting was widely expected to be inconsequential, with no expectation that the committee would lower the overnight rate. We mentioned in last week’s “Wrap” that there was a chance that the committee could adjust the “dot-plot,” their expected path of interest rates for the near future, to reflect only one rate cut this year. That’s exactly what they did, and they amended the forecast for 2025, now expecting 100 basis points of rate cuts versus the 75 they were previously forecasting. Interestingly, the official statement this month referred to the progress in reducing inflation as “modest,” compared to last month, where they referred to it as a “lack of further progress.”
At the post-meeting press conference Chairman Powell struck a decidedly confident tone, noting the economic growth has eased from the robust pace experienced in 2023 to a more moderate, healthy pace currently. Moreover, when questioned about the need to cur rates at all, he responded with unusual candor, saying “We think policy is restrictive.”
The University of Michigan released their preliminary survey results this morning and the news was not good. The current conditions index plunged to 62.5 from the 72.0 recorded at the last survey. That’s an enormous move to the downside and a harbinger of slowing economic growth. The 1-year inflation expectation came in at 3.3%, the same rate recorded last month.
For the week, the two-year note closed 18 basis points lower, closing at 4.69%, a positive return for holders but still well above the 4.15% touched in January.
Next week Retail Sales for May will be released on Tuesday with housing starts and existing home sales being released on Thursday and Friday, respectively.
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