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Dear clients and friends,

At Perseus Wealth, we believe that your understanding of the market is crucial to your investment decisions. Therefore, we are sharing these critical topics of conversation that deserve the most attention this month.   We value your insights and would love to participate in further discussions if you have any questions or would like additional details.

What’s Happening:  As analysts assess the health of the economy, the latest jobs reports appear to indicate a potential slowdown. In April, nonfarm payrolls rose by the smallest amount in six months, while the unemployment rate ticked up from 3.8% to 3.9%[1] for the second time in the last 3 months. This rise in unemployment, coupled with weaker-than-expected business activity in the service sector[2], suggests a potential cooling in the labor market. Jobless claims are also on the rise, with significant increases in claims observed in New York and California, where minimum-wage hikes may further negatively impact unemployment[3]. Finally, a May report from an employment agency found that, while  job cuts have decreased, hiring plans are at their lowest since 2016[4].

The concerns about the employment situation were accompanied by slower growth in the US economy in the first quarter of 2024: real GDP only increased at an annual rate of 1.6%, falling short of the 2.5% expected by economists and down from 3.4% in the previous quarter[5]. Consumer spending and housing investment were key growth drivers, although personal spending grew at a slower-than-expected rate. Spending on services saw its largest increase since Q3 2021, primarily driven by health care and financial services, while spending on goods declined. In this most recent version of “bad news may be good news” (for the markets at least), both higher unemployment and lower economic results offer greater hope for the Federal Reserve to initiate rate reductions sooner rather than later, with all major indexes hitting new all-time highs last week.

In a much-needed reprieve from inflation, the Consumer Price Index (CPI) slowed for the first time in six months, increasing by only 0.3% in April (the smallest month-over-month increase since November 2023) and 3.4% over the past year6. Core CPI, which excludes the more volatile food and energy components, rose 0.3% in April and 3.6% from last year[6]. Economists see core CPI as a better inflation indicator, which showed a three-month annualized increase of 4.1%, the smallest since the start of the year6. However, The Federal Reserve’s preferred inflation measure, the core Personal Consumption Expenditure (PCE) price index, rose at a higher-than-expected 3.7% rate, marking the first quarterly acceleration in a year[7]. Bloomberg Economics notes that the April CPI report may support the possibility of a July rate cut, but the Fed remains cautious[8].

The Bottom Line:  While the latest employment, economic and inflation figures may give the Federal Reserve hope that their rate actions of the last couple of years may be having intended consequences, officials continue to emphasize that they need more data before considering rate cuts. Chairman Jerome Powell emphasized the need for patience, with several Federal Reserve officials having stated that rates would likely remain high, with some anticipating no rate cuts this year. Conversely, given the negative changes beginning to occur in unemployment and the economy, waiting too long to moderate rates carries with it the concern that the economy could slow too far and too fast, leading the way to a recession. Either way, expectations on what the Fed may do continue to change and, if opinions shift rapidly enough, can cause short-term bouts of market volatility.

Best always,

Sean and John

 

The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and does not guarantee future results. All indices are unmanaged and may not be invested directly. The economic forecasts outlined in this material may not develop as predicted, and there can be no guarantee that any strategy will be successful.


[1] Bureau of Labor Statistics, https://www.bls.gov/news.release/empsit.nr0.htm

[2] Institute of Supply Management, https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/services/april/

[3] Department of Labor, https://www.dol.gov/sites/dolgov/files/OPA/newsreleases/ui-claims/20240935.pdf

[4] Bloomberg News

[5] Bureau of Economic Analysis, https://www.bea.gov/news/2024/gross-domestic-product-first-quarter-2024-advance-estimate

[6] Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm

[7] Bureau of Economic Analysis, https://www.bea.gov/news/2024/personal-income-and-outlays-february-2024

[8] Bloomberg News

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