Inflation Continues to Fall
CPI growth seems to have peaked in December of 2022, falling consecutively each month since. While much of this has been attributed to relief in supply chain bottlenecks, a great deal has also been due to the Fed’s monetary tightening, which has continued throughout the last 10 FOMC sessions.
The Fed maintains that further tightening is likely to occur, but has held off on raising rates in their most recent session (June 14th) to witness the impact of previous rate hikes on the economy. While inflation is easing, it appears that further rate hikes are likely to occur, potentially adversely affecting the market.
Graph 1: Percent Change in CPI from Jan 2021 to May 2023. Peak occurs in December 2022, with steady decline ever since.
Debt Ceiling Tensions Resolved
After months of debate in Congress, both Houses have successfully passed legislation to suspend the debt ceiling until the elections in November 2024. Under the legislation, Federal government expenditures have been significantly reduced (with the exception of Defense Spending), potentially helping alleviate some of the inflationary burden the economy is facing.
The deal also had provisions for energy vehicle (EV) and autonomous vehicle (AV) companies, allowing them to more easily acquire development permits, making production and entry into the market much simpler.
Broader Economy Is Slowing
The economy remains at near-historic lows in unemployment, sitting at just 3.6%. Furthermore, the quality of labour has increased significantly, with the prime age employment-to-population ratio at 80.8% (the highest it’s been in nearly 20 years). This indicates that the likelihood of a recession is quite low, as unemployment rates would have to rise incredibly quickly for that to occur.
Graph 2: U6 Unemployment Rate from 2018 to 2023.
Graph 3: Prime Age (25-54 Yrs) Employment-To-Population Ratio 2000 to 2023
However, signs show the economy is slowing down. Business investment in equipment has fallen, and is expected to continue falling as a result of the recent interest rate increases. Investments in intellectual property have also slowed in recent quarters, indicating muted growth in the near-term until inflationary pressures recede and the market adjusts to the new rates.
Graph 4: Business Investment in Equipment 2020 – 2023. The graph peaks between Q2 and Q3 2022 and steadily declines from that point onwards.
US Equities Growth
The financial markets have seen continued growth over the last year, with the S&P 500 up 15.5%. Key industries responsible for this growth include IT, Consumer Discretionary, and Communication Services.
Graph 5: Change in specific S&P 500 sectors.
Bonds, alongside equities, have seen a modest recovery since the beginning of the year. The S&P High Yield US Corporate Bond Index is up 4.58%, indicating that bonds are still growing in value and yield despite fears over bond investment earlier this year.