There were six crewed moon landings from 1969 to 1972. While the first moon landing was very memorable, very few people remember the next five moon missions. Similarly, if we get six quarter-point rate cuts, that would only reduce rates by 1.5% from the current 5.25-5.5%. However, the timing of the first cut is important as this may fuel expectations of looser conditions ahead. One small step at a time.
The question remains how low will rates go? Interest rates will come back toward earth, but will not orbit anywhere near zero. Fed Chairman Powell said the so-called neutral rate of interest has moved up as well. The neutral rate is the rate at which the Fed’s short-term Fed Funds rate neither speeds up nor slows down the economy. The Fed has raised its estimate to 2.8% this year and Powell suggested it could go even higher. The Fed’s longer run estimates suggest a 4.1% Fed Funds rate in 2025 and 3.1% in 2026. The best guess on unemployment is that it ticks up to 4.2% next year with real GDP of about 2%. Not too hot, not too cold. Rarely do projections work out so neatly, though, as unemployment already reached 4.1% last month. Apparently, this balancing act is keeping Chairman Powell up at night.
The S&P 500 hit a new record high yesterday of 5,600. That is above the high end of targets that most market strategists expected coming into the year. It has been a meteoric rise driven by several top technology stocks that incorporate AI or that serve AI markets. For example, Apple# rose yesterday on news that it is looking to ship 10% more new iPhones this year, including AI-capable phones, after a rocky 2023. AI capabilities create a reason to upgrade your iPhone earlier than you may have considered otherwise.
CPI inflation numbers will be released this morning, and expectations are for core CPI, which excludes food and energy, to rise 0.2% in June for a second month. That would mark the smallest back-to-back gains since August of last year. The Fed’s preferred inflation measure rose 2.6% in the 12 months through May, down from 7.1% in June 2022.
So, inflation is coming down, right? Yes and no. Wage inflation has been declining along with overall inflation rates, although there are still areas of stickiness in the core, including shelter, insurance, and now some membership fees. Costco# just upped its annual membership fees yesterday by 8% for the first time in 7 years (effective September 1st), which will impact about 52 million members. Costco pulled in $1.1 billion from membership fees in the last quarter, which is money that won’t be spent on goods and services.
Airfares have dropped 5.9% since May 2023, according to the last consumer-price index. Domestic airfare was 2% cheaper this July 4th week compared with last year, according to AAA, with the average price for a round-trip ticket at about $800. A record 29.7 million travelers passed through airport checkpoints from June 27 through July 7. That marked a 7.1% increase from a year earlier, according to TSA data, and was more than the agency had previously predicted.
A new movie, “Fly Me to the Moon,” comes out tomorrow about a fake moon landing shot in a movie studio. Pure fiction I am told. Hopefully the latest Fed comments and today’s CPI reading are not another head fake for markets. Chairman Powell noted considerable softening in the labor market, which provides cover for near-term rate cuts. There are risks in lowering rates too soon, which may lead to a resurgence in inflation. Too late, and we could end up with an unwelcome economic deceleration and faster-rising unemployment. The Fed will need to act carefully to avoid a difficult re-entry on rates and splash down safely.
Christopher Crooks, CFA®, CFP® 610-260-2219
Giorgio Armani turns 90 today while guitarist Richie Sambora of Bon-Jovi fame turns 65 and pop singer Alessia Cara turns 28.