On the last trading day of the week, month, quarter and six months, the market breathed a sigh of relief after inflation figures from the US showed annualized price growth of 3.8 percent in May.
PCE, which stands for “personal consumption expenditure,” is closely followed by the Federal Reserve as the basis for calculating inflation and is often cited as the central bank’s preferred measure of price growth.
Core inflation, as measured by the personal consumption expenditures index, was 4.6 percent in May. In April, PCE inflation was 4.4 percent year-on-year, and core inflation was 4.7 percent.
Two boxes of oil
The apples rose instantly from the start and kept boiling all day. The increase of just over two percent, to a closing price of $194, made the tech giant the first company with a historic market capitalization of $3,000 billion.
To put that number in context, Apple’s market capitalization is more than double that of the Norwegian Oil Fund, which at the time of writing is worth just over NOK 15,000 billion.
In Europe, the major indices also closed in positive territory for the day. This means that the broad Stoxx 600 index rose 7.7 percent in the first half of the year, despite continued high inflation and interest rate hikes across the continent. However, the development is small compared to the USA:
- The Nasdaq Composite Index is up one and a half percent and thus up 32 percent so far this year. The first six months of 2023 were the best start to a year since 1983. Whatever half of the year it was, the first six months of 2023 were the best since the second half of 1999. It’s tech giants like Apple, Meta, Amazon, Microsoft, Nvidia who pulled the load. The value of the latter has tripled since the beginning of the year.
- The Dow Jones rose 0.8 percent and is up four percent so far in 2023.
- The S&P 500 ended the half year up 1.2 percent and is up just over 16 percent for the year.
More rate hikes?
Unlike the Consumer Price Index (CPI), the weighting of goods and services in personal consumption expenditures is adjusted to take into account changes in people’s consumption habits. The PCE deflator is the amount that the US central bank uses as a basis in its calculations of inflation trends, and is therefore the Fed’s preferred measure of price growth.
Last week, Jerome Powell and the Monetary Policy Committee decided to hold the key interest rate steady, but the “dot plots” outlook released the same evening gave clear signs that the interest rate will continue to rise.
Dot charts tell what the members of the Federal Reserve’s interest rate committee think about the level of interest rates in the future. Prior to the meeting, this outlook was expected to point in the direction of one rate hike for the year.
The bottom line is that the Fed’s interest rate committee envisages two more rate hikes this year.
In the previous point chart – in March – Fed rate committee members thought on average the interest rate level of 5.1 per cent at the end of 2023. This has recently been revised upward to 5.6 per cent.
On Wednesday this week, a group of dignitaries gathered for a group debate, when European Central Bank President Christine Lagarde, Federal Reserve Chairman Jerome Powell, Bank of England President Andrew Bailey and Bank of Japan Governor Kazuo Ueda took their places at the podium.
Lagarde repeated the message that another rate hike is highly likely at the next meeting in July, while Bailey admitted that inflation has remained uncomfortably high due to a lack of manpower after the pandemic.
Powell estimated that he and the Fed’s interest rate committee envisioned raising interest rates at least twice.
– We believe there is more tightening to come. Driver is a very stressful job market. He said that I did not want to rule out the possibility of several consecutive hikes in interest rates.
All three warned that further rate hikes may be necessary to bring down inflation.
Strong job market
Powell went on to say that the US economy showed strength despite many expecting a recession in the coming months.
According to the central bank governor, there is still a chance to avoid extremely high unemployment, which was the result of earlier interest rate hikes. The reason for this is that labor is still needed.
Regarding the possible recession scenario, Powell said that he does not see it as the most likely outcome, but stressed that it is likely to happen. He went on to pour cold water on the backs of those who hoped for a speedy normalization of the soaring price increase.
Powell doesn’t expect core inflation in the US to fall to 2 percent either this year or next, but he expects it to happen in 2025 first.
– He said we will be tied up as long as necessary.
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