Fed in the Balance

1.Economic Data Shows Two Stories. The personal consumption expenditure (PCE) for April was the major data print last week, coming in-line with market expectations at 2.7% y/y. Core PCE also came in-line with expectations at 2.8% y/y. PCE is the Fed’s most closely watched inflation gauge, which is down from its highs of 5.5% y/y in February 2023 and is currently at its lowest level since March 2021. 

A 2.7% inflation rate is still far from the Fed’s 2% goal and does not do much to move rate cut expectations forward. The Fed will need to see a continued downtrend in inflation going into the second half of the year for rate cuts to stay on the table for this year. In our view, it is unlikely that the Fed will cut this year. As of May 31, markets are pricing just 30 bps worth of cuts in 2024, with the CME FedWatch tool projecting a 47% chance of a 25 bp cut in September.¹ 

The Fed’s Waller recently gave April’s inflation report a C+, saying it was “far from failing but not stellar.”² Similar to the Fed, we will be stuck watching the data for continued cooling in the coming months. 

Chart 1: Yields Move Higher as Inflation Appears to Be Sticky³ 

The consumer remains in good standing with initial jobless claims below 220,000, a 3.8% savings rate and 4.46% personal income growth rate. But the manufacturing front is telling a different story. Chicago PMI for May came well below expectations at 35.4; smoothing the last three months is slightly better at 38. This is far below a reading of 50 that would indicate expansion. We are watching manufacturing data to see if this is a continued trend or just a seasonal impact.  

2. AI Spend Over Everything. Last week, major enterprise software earnings reports showed spending is shifting away from software. Salesforce (CRM) cut its subscription revenue outlook and discussed spending disappointments from its customers. CRM fell 19.7% on May 30, its largest single-day decline since 2004, and had the single largest points drag (353.30 points) on the Dow Jones Industrial Average in 20 years. Companies invested heavily into enterprise software during the pandemic, and now investments have shifted to AI and datacenter spending. Workday (WDAY), Service Now (NOW) and other software-as-a-service companies took hits last week on fears that investments will dry up amid AI focus.  

Chart 2: Salesforce Takes a Hit as Revenue Guidance Comes in Below Expectations⁴ 

CTOs are directing their budgets towards AI and cybersecurity, and it’s no mystery why that’s the case… cyberattacks increased 45% y/y in 2023, with a focus on AI and other new frontiers. The broad adoption of AI and large language models has the potential to transform the landscape and generate new challenges. The total addressable cyber market is forecast to reach $2 trillion over the next eight years (10x upside according to McKinsey). Ransomware set new records in 2023, and analysts predict it will cost victims $265 billion annually by 2031 (30% y/y growth), with new attacks every two seconds. 

3. Fixed Income. U.S. Treasury yields traded mixed on the week (front-end rally, longer end sell-off) as PCE came in-line. Fedspeak was also mixed on the week before the June FOMC meeting blackout, with some members (the NY Fed’s Williams) calling the current target rate restrictive and others (the Dallas Fed’s Logan) saying it’s not as restrictive as believed. Corporate spreads continue to grind tighter, with high yield spreads nearing 2021 lows. Muni yields underperformed for a third consecutive week as May issuance reached the highest level since December 2020 ahead of what are normally strong performing summer months. 

4. The Week Ahead. 

Earnings – Monday: GTLB; Tuesday: BBWI, DBI, CRWD, HPE, PLAY; Wednesday: CPB, DLTR, LULU, VSCO, FIVE; Thursday: ADSK, DOCU, SJM. 

Economics – Monday: ISM Manufacturing, Construction Spending; Tuesday: Durable Orders, Factory Inventories; Wednesday: ISM Services, ADP Employment Survey; Friday: Nonfarm Payrolls, Hourly Earnings, Unemployment Rate. 

Stephanie Link’s TV Schedule: 

Return for Selected Indices⁵ 

Sources

1. CMEGroup. As of May 31, 2024.
2. WSJ. As of May 21, 2024.
3. FactSet. As of May 31, 2024.
4. Bloomberg. As of May 29, 2024.
5. Bloomberg. As of June 3, 2024.

Disclosure 

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, as a member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC. This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors. All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice. This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.