Weekly Economic Update: July 3, 2024

Presented by Nicholas Wealth Management

Inflation and GDP spark rate-cut chatter

Last week was pretty quiet. The market meandered through mid-week as we awaited the final reading of first-quarter gross domestic product (GDP) on Thursday plus inflation and payroll numbers for May on Friday.

The final reading of first-quarter GDP was revised upward by one-tenth from 1.3% to 1.4% (not anything earth-shattering). The reading confirmed the economy is slowing and cracked open the door for more whispers of rate cuts by September.

On Friday, the May Personal Consumption Expenditures (PCE) and Core PCE numbers — the Federal Reserve’s favored measures of inflation — came in at a consensus reading of 2.6% year-over-year for both. We saw a small decrease from April’s readings (PCE was 2.7% and Core PCE was 2.8%), which points to better, albeit muted, news on that front. There were concerns we would see a resurgence of inflation in May, but that didn’t materialize and markets rejoiced on Friday.

Inflation will most likely continue to fluctuate with energy costs, specifically with the price of gas. It’s probably not a coincidence that the consumer price index (CPI) reading topped out in June 2022 right as gas prices crested over $5 per gallon. Statisticians will say gas and food prices aren’t included in all their various calculations because they are “volatile,” but the relationship is rather obvious and seems predictable. It’s not unlike the stock market going down when interest rates go up; it’s a very direct relationship since energy is used in everything.

Getting back to the improved May inflation readings — guess what gas did in May? Yep, it went down. The average price per gallon of regular unleaded went from $3.68 on May 1 to $3.56 on May 30. We saw a little spike over Memorial Day, but overall the decline was a modest 11 cents over the month and lines up nicely with a modest decline in inflation.

Finally, along with PCE and Core PCE, personal income for May was at the upper end of the consensus range. A slowing economy, a decline in the inflation rate and perhaps a weakening in the jobs market (which will be reported this week) just might be the ticket to get the Fed to cut rates sooner than they have said. It’s still too early to tell, but it looks like the data is finally beginning to align. The markets took notice for most of Friday before slipping to end the week and quarter (see discussion below).

Fuel Price Trends

Source: gasbuddy.com

Inflation Rates: May 2020-May 2024

Source: Statista.com

Nvidia cools off as the market begins to look for new leadership

After Nvidia briefly passed Microsoft and Apple to become the world’s highest-valued company a few weeks ago, people began taking profits and some of the fever surrounding Nvidia began to break. Maybe it was time to back off after the 10-for-1 stock split drove the price of Nvidia up over 10% (from around $120 to $135) in a little over a week.

This shouldn’t be viewed in the light of the AI rally finally coming to an end but as a pause to settle things down after a pretty wild ride. AI is here to stay and will feature prominently in our future. However, there will be fits and starts and different players will emerge to take the lead.

Last week was less about Nvidia and more about the data, especially as we ended the week. The economy is cooling and inflation is declining, albeit slightly. That gives new life to the possibility of rate cuts from the Fed sooner rather than later. The rise in the market so far in the first half of the year has been very narrow with the rest of the market basically flat. High-flying tech stocks have moved markets upward while higher interest rates have mostly pinned the rest of the market down. If interest rates begin to fall and are more than the market is expecting, look for all these “laggards” to perk up as we rotate back into a broader market. If this happens, we may see the rest of the market catching up to high-flying tech stocks rather than a tech stock crash.

Be mindful that this rotation will cause volatility, something that has been notably absent in the first half of the year. The S&P 500 traded above 5,500 for the first time on June 20, and it is likely to eclipse 5,500 and move upward from there in the weeks ahead.

Coming This Week

• It’s going to be a short week for markets with only three full trading days. Markets will close early on July 3 and remain closed on July 4, then resume trading on Friday. It’s very unlikely things will be active since most traders will make a four-day weekend out of the holiday.
• The only really meaningful data this week will be on the jobs front: job openings on Tuesday, ADP and jobless claims on Wednesday and the Bureau of Labor Statistics (BLS) non-farm payrolls on Friday. Last month the unemployment rate hit 4%; if that number rises, it will reinforce calls for a rate cut sooner than what the Fed has said. Another item worth monitoring is hourly wage growth, which last month grew at a higher rate than inflation. If that number slips, it will point toward further economic weakness and make another case for rate cuts.

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