June 10, 2024

The April showers did, in fact, bring May flowers. Markets hit record highs on the back of the April Consumer Price Index (CPI) report.¹ On Friday, May 17, the Dow Jones Industrial Average (DJIA) reached a new all-time high and closed above 40,000. After hitting this mark, there was light volatility as markets lost steam for a few days, but shortly thereafter things picked back up once again. Equity markets returned 5.16% and 7.24% for the month as tracked by the S&P 500 Index and Nasdaq Index, respectively.

International markets also performed well, returning 0.33%and 3.72% for the month tracked by the MSCI Emerging Market Index and the MSCI EAFE Index, respectively. Bond markets brought in the back of the pack returning 1.32% as tracked by the Bloomberg Aggregate Total Return Index. On the first of the month, the Federal Reserve held their third press conference this year where, for the sixth time in a row, they chose to hold rates. Consumer behavior is typically impacted by changes in interest rates, making it an effective tool for the Federal Reserve. Higher interest rates generally facilitate a reduction of consumer debt and spending and increase private savings. Accordingly, consumers are usually responsive to decisions about rate hikes or cuts made by the Federal Reserve.

Current futures data indicate that some market participants are already pricing in potential September rate cuts, and also anticipating a further cut in November or December. Still others are less convinced the Fed will make any cuts this year. Essentially, the longer it takes for inflation to come down, the longer it will be until the Fed begins to cut rates. The CPI report is often used as a guide for making economic decisions and changes in this monthly report are rapidly incorporated in market prices. Owing to the market reaction of the most recent CPI report, it appears that investors have sifted through the data to find any indication of a decrease in inflation. The CPI for all items rose .3%  compared to March where it rose .4%, and for the 12 months ended April it rose 3.4% compared to the 12 months ended March where it rose 3.5%. This data suggests that inflation is on a slight downward trend.

Residential and commercial real estate markets are impacted by their relationship with interest rates. The recent high interest rate environment has forced a decrease in home prices, because higher interest rates reduce consumer buying power. Income producing real estate faces increased risk with higher interest rates. For this reason, investors with exposure to the housing market are particularly interested in lower interest rates. Although it may be a bit preemptive, 30-yr rates, as tracked by the Federal Home Loan Mortgage Corporation (AKA “Freddie Mac”), dipped to 7.02%following the release of this CPI report.²

Finally, the Bureau of Labor Statistics reported that labor market conditions remain ight as initial unemployment claims dropped year over year.³ Despite these positive indicators for markets, Fed chair Jerome Powell commented to a group of attendees at the annual general meeting of the Foreign Bankers' Association in Amsterdam “I expect that inflation will move back down on a monthly basis to levels that were more like the lower readings we were having last year” and went on to remark “I would say my confidence in that is not as high as it was, having seen these readings in the first three months of the year. So, we are just going to have to see where the inflation data fall out.”⁴And that we will. 

Somehow, resilient economic growth has powered markets well into the second quarter of the year. The CPI reports are released monthly, and investors will be closely monitoring the upcoming May report, along with the upcoming press conference to be held by the Fed just prior to the release of the CPI report. Markets will react to information and data from each of these with futures markets being particularly sensitive to this information. 2024 has thus far been characterized by various major milestones, among those, the launch of spot cryptocurrency Exchange Traded Funds (ETFs), DJIA closing above 40,000, and booming tech company earnings.

Hazel Allen
OPS Analyst