5/10/24 - Market Digests Central Bank Actions and Economic Data

The market embraced a relatively calmer tone this week amid light economic data. Early in the week, the Federal Reserve’s first quarter Senior Loan Officer Opinion Survey on Bank Lending Practices was published. In aggregate it showed lending standards remain restrictive, but fewer banks are tightening than last quarter. Demand for credit is still weak but stabilizing. The market digested comments from a chorus of Fed speakers this week, underscoring Fed Chair Powell’s remarks after the FOMC meeting and expressing a range of views regarding the future path of interest rates.

Other major central banks took a more dovish tilt than the Federal Reserve this week. The Bank of England left the benchmark interest rate unchanged but signaled future rate cuts potentially as soon as this summer. The vote was not unanimous, with two of the nine members calling for an immediate rate cut. The European Central Bank minutes were released, which similarly reinforced a widely held market view that key interest rates will likely be lowered this summer. Additionally, Sweden’s Riksbank cut its rate for the first time since 2016.

In economic data, Initial Jobless Claims increased 22,000 to a higher-than-expected 231,000 level, and Continuing Claims rose 17,000 to 1.785 million. Recent trends continue to indicate a tight labor market, but this week’s report may flash early warning signs of a slowdown. The University of Michigan Consumer Sentiment Index took a dive as inflation expectations increased. The preliminary index for May fell to 67.4 from 77.2 in April. Consumers are seeing a stall in disinflation, and moderation in hiring and wage growth is also dampening consumers' confidence. Both current conditions and expectations dropped to the lowest levels since November 2023. The 1-year inflation expectations measure rose three-tenths to 3.5%, and the 5-year inflation expectations measure rose one-tenth to 3.1% in May, reaching their highest levels since November 2023. Relative stability in the 5-year measure indicates that inflation expectations remain anchored. The report underscores the Chandler view that consumer spending will slow in the face of growing headwinds such as depleted savings and increasing borrowing costs.

Interest rates remained range-bound this week with the 2-year US Treasury trading at 4.86%, the 5-year at 4.52%, and the 10-year at 4.51% as of this morning. Next week the market will be watching key inflation data for the Fed’s future policy decisions.

Next Week:

PPI, CPI, MBA Mortgage Applications, NY Fed 1-Year Inflation Expectations, NFIB Small Business Optimism, Retail Sales, Housing Starts, Business Inventories, NABH Housing Market Index, TIC Flows, Jobless Claims, Building Permits, NY Fed Services Business Activity, Philadelphia Fed Business Outlook, Import Price Index, Export Price Index, Industrial Production, Capacity Utilization, Leading Index

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