In the markets:
Stocks recorded a week of strong gains, as investors welcomed data showing a continued cooldown in inflation. The S&P 500 Index ended the week 6.50% below the all-time intraday high it established in early 2022. The Nasdaq Composite recorded an even stronger gain but remained 12.94% below its record peak. Standout performers within the S&P 500 included casino operators, along with regional banks and asset managers. Laggards included some major pharmaceutical firms and the typically defensive consumer staples sector. The Dow Jones Industrial Average added 774 points finishing the week at 34,509, a gain of 2.3%. The technology-heavy NASDAQ Composite retraced all of last week’s decline and more rising 3.3%. By market cap, the large cap S&P 500 gained 2.4%, the mid cap S&P 400 added 2.7%, and the small cap Russell 2000 fared the best rising 3.6%.
Major international markets finished in the green as well. Canada’s TSX rose 2.2% along with the United Kingdom’s FTSE 100 which added 2.4%. France and Germany finished up 3.7% and 3.2% respectively, while China’s Shanghai Composite gained 1.3%. Japan’s Nikkei finished essentially unchanged. As grouped by Morgan Stanley Capital International, emerging markets surged 4.1%, while developed markets gained 4.2%.
Precious metals were also bid. Gold rose $31.90 to $1964.40 per ounce, a gain of 1.7%, while Silver surged 8.2% to $25.19 per ounce. The industrial metal copper, viewed by some analysts as a barometer of world economic health due to its wide variety of uses, finished the week up 4%. West Texas Intermediate crude oil rose 2.1% last week, closing at $75.42 per barrel.
U.S. Economic News:
The number of Americans filing for first-time unemployment benefits last week fell by 12,000 to 237,000, indicating most companies are reluctant to terminate workers even as the economic environment becomes more uncertain. Historically, unemployment claims typically rise when the economy weakens and a recession approaches. Claims have moved up this year from historic lows, but they still aren’t pointing to a big deterioration in a very tight labor market. Businesses have struggled to hire employees given the shortage of qualified labor, and they don’t want to resort to layoffs unless the economy weakens a lot more. Meanwhile, ‘continuing claims’, which counts the number of people already receiving benefits, rose by 11,000 to 1.73 million marking its first increase in a month. Thomas Simons, U.S. economist at Jefferies stated, “The claims data do not show significant evidence of a pickup in layoff activity, but job growth will slow as people become increasingly more difficult to find to fill open positions.”
Confidence among U.S. small-business owners increased in June. While optimism seems to be heading up, inflation and labor concerns continue to weigh on sentiment. The National Federation of Independent Business (NFIB) reported that its small-business optimism index rose from 89.4 in May to 91 in June, which was below the index’s 49-year average of 98. Small businesses in the U.S. account for nearly half of the jobs in the private sector. In NFIB’s survey, inflation and labor quality held the top rankings for concerns among owners, while 24% listed inflation and labor quality as their most significant challenges. Since May, owners expecting improved business conditions over the next two quarters improved by 10 percentage points, 21 points ahead of last year’s survey. Owners who said that job openings were difficult to fill declined to 42% in June. NFIB Chief Economist Bill Dunkelberg said that higher costs associated with inventory troubles, labor, and energy, force owners to continue raising prices. "Halfway through the year, small-business owners remain very pessimistic about future business conditions and their sales prospects,” Dunkelberg said. "Inflation and labor shortages continue to be great challenges for small businesses."
U.S. consumer prices saw a 0.2% increase last month and the inflation rate decreased to its lowest level since 2021. Yet analysts note inflation is not slowing fast enough to deter the Federal Reserve from raising interest rates one or two more times this year. A shortage of labor is increasing wages and increasing the difficulty in constraining inflation. The central bank has jacked up the rate to 5.25%, in contrast to near zero a year and a half ago. The core rate of inflation, which excludes food and energy, rose 0.2% last month, the smallest increase in two years. Over the last 12 months, the rate slowed from 5.3% to 4.8%, but remains well above the central bank’s 2% target. At its next meeting in two weeks, the Fed is widely expected to raise its benchmark short-term interest rate. Robert Frick of Navy Federal Credit Union said, “Prices for everything from eggs to used cars dropped in June, causing a big deflation in inflation.” Used-vehicle prices dropped 0.5% in June, down 5% from 2022, while the cost of plane tickets slipped for the third month in a row at 8.1%. Food prices have increased 4.7% since last year but are down 13.5% from a year earlier. Housing costs, the largest category of the consumer price index and the most pressing influence on inflation, are not slowing as quickly as the Federal Reserve had hoped. Rent prices accelerated 8.3% over the past year. However, they seem to be slowing down, which should appear in the CPI later this year. This could further slow the inflation rate over the next two quarters. “By one measure, inflation is just one-third of what it was a year ago. However, this is not yet a turning point. Core inflation will prove tougher to beat,” Frick said.
The rise in prices at the wholesale level slowed to crawl possibly signaling lower prices ahead for consumers. The Produce Price Index (PPI) rose just 0.1% in June, suggesting inflation is likely to decelerate. Economists had expected a 0.2% increase. Wholesale costs often foretell future inflation trends. The increase in wholesale prices over the past 12 months slowed to 0.1% from 1.1% in the prior month. That’s the lowest reading since September 2020. A separate measure of wholesale prices that strips out volatile food and energy costs and trade margins also increased 0.1% last month, the government said. The increase in these so-called core prices over the past year decelerated to 2.6% from 2.8%, marking the smallest gain since March 2021. Despite the tepid reading, many analysts are still expecting a rate hike at the July FOMC meeting. “It’ll be one and done for the Fed with the final rate hike in its historical tightening cycle coming at the July FOMC meeting,” said chief economist Gregory Daco of EY Parthenon.
The Federal Reserve’s ‘Beige Book’, a collection of anecdotal reports from each of its member banks, reported economic activity increased only slightly in late May and June and that slow growth was expected to continue. The Fed said that five of its 12 districts reported slight or modest growth, five noted flat activity and two reported slight or modest declines. The report said that labor markets were healthy, with some sense that hiring was getting more “targeting and selective.” Many experts say that the labor market has to cool to get inflation on a path towards the Fed’s 2% target. Worker’s wages continued to rise but more moderately than in the past, the report said. Some districts reported that consumers had grown more sensitive to higher prices, limiting which firms could pass along input cost increases. Others reported that solid demand allowed firms to maintain margins.
International Economic News:
The Bank of Canada hiked rates by 25 basis points to 5% and forecasted the CPI to return to its 2% target by mid-2025. This marks Canada’s 10th consecutive increase and its highest rate since 2001. In reaction to the BOC’s statement, the USDCAD fell from 1.3188 to 1.3155. The central bank edited out statements from June’s statement suggesting that the monetary policy was not sufficiently restrictive to balance supply and demand and meet the 2% CPI target. In contrast to earlier forecasts this year, the BOC’s CPI inflation forecast is more sluggish than in prior statements. CPI inflation is now forecasted to hover around 3% through this year before declining to 2% in 2025. Through 2023, lower energy prices assisted in the downward momentum in CPI inflation, more so than underlying inflation beginning to ease. The economy continues to absorb higher interest rates, which the central bank expects to lead to sluggish economic growth, averaging 1% through the next two quarters of 2023. This implies real GDP growth of 1.8% over the next two quarters.
The UK economy contracted by 0.1% in May, less than expected, but economists warned that recent interest rate rises would hit growth in the second half of the year. An extra bank holiday to mark the King’s coronation contributed to the fall in UK gross domestic product between April and May, the UK’s Office for National Statistics data showed. Economists had expected a 0.3% drop. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said the 0.1% fall, which followed a slight rise in May, confirmed “that the economy was floundering even before the impact of recent interest rate rises are fully felt”. The Bank of England has increased its policy rate from a historic low of 0.1% in November 2021 to 5% today, with markets anticipating a further rise to 6.25% by the end of the year.
Francois Villeroy de Galhau, Governor of Banque de France, expostulated a suggestion from French economists to raise the European Central Bank’s 2% inflation target. Villeroy said that the ECB’s interest rate hikes would remain at elevated levels long enough for the impact to feed through the economy. At an economics conference in the French city of Aix-en-Province, Villeroy said that the aim was to bring inflation down to the 2% target by 2025. Former IMF economist, Frenchman Olivier Blanchard, argued that an inflation target above 2%, when shared by most major central banks, would provide greater flexibility and would outweigh the costs. French economist Patrick Artus also endorsed a higher target at the conference. Villeroy described a higher inflation target as a “false good idea” that would stimulate higher borrowing costs. “If we announced our inflation target is no longer 2% but 3%, lenders would immediately demand higher interest rates, at least 1% (more),” Villeroy said.
Germany’s finance ministry plans to offer companies $6.6 billion a year in tax relief against the backdrop of a difficult economic environment, according to ministry sources. German business morale has been deteriorating, suggesting that Europe's largest economy will struggle to shake off recession. "The economy needs stimulus - rarely has this been so urgent as now," finance minister Christian Lindner said. The tax relief plan will be part of the draft Growth Opportunities Act, which the Free Democrat Lindner has proposed to make Germany more competitive amid high energy prices and burdensome bureaucracy. The draft legislation includes a total of almost 50 tax policy measures, mainly aimed at small and medium-sized enterprises. One key provision incentivizes companies to invest in climate protection by offering tax benefits between 2024 and 2027 if they make climate friendly investments.
China's exports fell last month at their fastest pace since the onset three years ago of the COVID-19 pandemic. Momentum in China's post-COVID recovery has slowed after a brisk pickup in the first quarter, with analysts now downgrading their projections for the economy for the rest of the year. Outbound shipments from the world's second-largest economy slumped a worse-than-expected 12.4% year-on-year in June, data from China's Customs Bureau showed, following a drop of 7.5% in May. Imports contracted 6.8%, steeper than an expected 4.0% decline and the previous month's 4.5% fall. "The global downturn in goods demand will continue to weigh on exports," said Zichun Huang, China economist at Capital Economics, with a further decline in exports seen likely before they bottom out towards the end of the year.
Japan's nominal base salary grew at the fastest pace in 28 years in May, government data showed, adding fuel to the debate over when the central bank will unwind its ultra-loose monetary stimulus. Global financial markets have been closely watching Japan's wage data, as Bank of Japan Governor Kazuo Ueda regards pay growth as a key gauge to consider in deliberations about a shift in policy. Regular wages rose 1.8% in May from a year before, labor ministry data showed, the biggest gain since February 1995. The strong base pay growth boosted worker's total cash earnings, or nominal wages, by 2.5% in May, after a revised 0.8% increase logged in April. "If inflation stabilizes around 2% and nominal wages accelerate to 3% to 3.5%, the condition could be set for the BOJ to dismantle monetary easing framework from the Kuroda era," said Hisashi Yamada, economist and Hosei University professor. Japan's largest labor organization Rengo said that major companies had agreed to average pay hikes of 3.58% this year, the highest since 3.9% in 1993.
So-called “range anxiety” is frequently cited by consumers as one of the biggest hurdles to purchasing an electric vehicle or ‘EV’. As recently as 2017, the average range of an EV was just 217 miles, about half of the average gasoline car’s 413 mile range. Thankfully for those looking to adopt the new technology EV’s with over 300 miles of range are becoming much more common. Visual Capitalist’s Marcus Lu shows in the infographic below the top 10 EVs for 2023 ranked by their EPA combined driving range.