ETFs
Exploring Inflation and Consumer Sentiment
Economic indicators provide insight into the overall health and performance of an economy. They are essential tools for policymakers, advisors, investors and businesses to make informed decisions regarding business strategies and financial markets. In the week ending June 13, the SPDR S&P 500 ETF Trust (TO SPY A) increased by 1.46% while the Invesco S&P 500® Equal Weight ETF (RRSP A-) was down 0.21%.
Inflation has been a constant topic of conversation in recent years because of its role in the Fed’s interest rate policy and its ability to quickly influence financial markets. The Fed has been reluctant to make changes to its monetary policy, emphasizing the need for more data and confidence that inflation is moving closer to its 2% target. At its meeting last week, the Fed voted to keep interest rates between 5.25% and 5.50% for a seventh straight meeting and expects just one rate cut for 2024. This article seeks to summarize three important economic indicators from the past week to provide insight into the latest trends in inflation and consumer confidence.
Economic indicators: Consumer Price Index
Inflation continued to show signs of slowing last month, even a surprising decline, after several higher-than-expected readings at the start of the year. THE Consumer price index rose 3.3% in May, compared to 3.4% in April and below the expected increase of 3.4%. Compared to the previous month, consumer prices remained stable, which is lower than the expected growth of 0.1%. Gasoline prices finally brought some relief to consumers’ wallets in May, falling 3.6% from April and helping to slow inflation. However, continued increases in housing costs more than offset lower gas prices, with housing costs increasing 0.4% for a fourth consecutive month.
Core inflation, which excludes food and energy prices, has returned to its lowest level in more than three years. Core CPI fell to 3.4% on an annual basis, lower than the expected growth of 3.5%. Additionally, core prices rose 0.2% from April, lower than the expected growth of 0.3%.
The question of when the Fed will begin cutting rates is still up for debate. The Fed is still expected to keep rates steady at its next meeting in July. And as mentioned previously, the Fed only expects one rate cut in 2024, according to its latest dot plot. At the time of writing, the CME’s Fed monitoring tool indicates a 90% chance of rate stability at the July meeting. However, the latest CPI figures support the view that two rate cuts this year remain a very real possibility. The CME Fed Monitoring Tool currently shows a 61% chance that the first rate cut will occur in September, with a December rate cut also being considered.
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Producer price index
Wholesale inflation eased unexpectedly in May, another positive sign for consumers. In May, the Producer price index fell 0.2% from the previous month, less than the projected growth of 0.1% from April. The latter figure marks the largest monthly decline in the overall index since October 2023. On an annual basis, the PPI increased by 2.2%, a slight slowdown from April’s 2.3% growth. and an increase lower than the expected increase of 2.5%.
Additionally, the core Producer Price Index (PPI), which excludes food and energy, remained stable on a monthly basis, below the projected growth of 0.3%. The core PPI rose 2.3% from a year ago, a deceleration from the previous month’s 2.5% increase in wholesale prices and lower than the projected increase in 2.4%.
The producer price index is widely considered a leading indicator of consumer inflation, as changes in producer prices are often passed on to consumers. The latest PPI report showed an overall cooling in inflation, which could signal lower future consumer prices, ultimately providing some relief to consumers.
Michigan Consumer Sentiment
Consumer attitudes have deteriorated this month, according to the preliminary report of the Michigan Consumer Confidence Index. The preliminary report for June came in at 65.6, a decrease of 5.1% from the final figure in May. The latest reading was well below the predicted value of 72.1. Sentiment has now weakened for three consecutive months and is currently at its lowest level since November 2023.
The Michigan Consumer Sentiment Index is a monthly survey measuring consumer opinions regarding the economy, personal finances, business conditions and shopping conditions. In the latest report, consumers expressed concerns about their personal finances due to high prices as well as declining incomes.
Consumer attitudes are closely monitored since their confidence level tends to influence their spending behavior. Since consumer spending accounts for approximately 70% of the economy, it has a major impact on economic growth.
THE Consumer Discretionary Select Sector SPDR ETF (XLY A) is related to consumer sentiment.
Economic indicators and the week ahead
Next week will reveal key economic data, including the latest figures on retail sales, industrial production and the Conference Board’s leading economic index. Individually, these measures offer insight into different aspects of economic activity: retail sales reflect consumer spending, industrial production measures the strength of the manufacturing sector, and the leading economic index provides indications of future economic trends. But taken together, they help paint a bigger picture of the overall health of the economy.
Retail sales data could impact interests in the SPDR S&P Retail ETF (XRT B+) while data on industrial production could have an impact on interests in the SPDR Funds for Selected Industry Sectors (XLII A).
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