Quarterly Economic Analysis - Q2 2024: Globalization & Monetary Policy - Markets Move, Data Flows, and Central Banks Speak
I want to thank you for joining us once again for our Economic Analysis for Q2 2024 at Portafolio Capital. If this is your first time reviewing an economic quarter with us, I want to welcome you to our newsletter.
There’s something inspiring about writing about the economy that can get me going on any given day. Below, I have compiled some information, data, and commentary in which I believe you may find compelling. If you have an IRA or any given retirement plan, aligning yourself with the pulse of the market really helps one visualize their own financial path in hindsight. Partnering with a great investment manager can further empower that narrative.
Please find a comfortable seat wherever you are at currently and take a moment to read our economic analysis below.
-Mau
Our view remains that domestic companies remain superior to emerging markets across the world. While the narrative begins to shift at various institutions across Wall Street, we remain steadfast in the acknowledgment that the most powerful companies in the world continue to be founded across the geographical footprint of the United States and the entrepreneurs it so well breeds. Entrepreneurism is alive and well in our great country! If you look across the board, market capitalization continues to grow, even at the rate of a slowdown in economic activity and restrictive monetary policy.
Throughout the quarter, the Federal Reserve has continued to signal that inflation has been at the forefront of their economic policy. Prior to the Fed’s current policy of increasing rates, markets and consumers benefitted from a low interest rate environment for much of the post-2008 era until the adoption of language discussing “transitory inflation” began to influence markets in 2019 (and maybe slightly prior to that time). The COVID pandemic did a great job of knocking the Fed off it’s course as it began to shift its narrative to increasing rates and it’s current restrictive monetary policy stance. Ultimately such affects came at the expense of higher costs to the consumer. Inflation was felt then, and in my opinion, is still being felt by the everyday consumer today.
Today, Chairman Powell continues his restrictive stance in Fed policy.
The last time the Federal Reserve raised interest rates was in July 2023, when it increased the federal funds rate to a range of 5.25% to 5.50% (upper limit displayed in the chart below). Since then, the Fed has held the rates steady across several meetings, including the most recent ones in January, March, May, and June 2024. The next Federal Reserve (FOMC) meeting will be held July 30-31st.
Inflation
The influence of higher interest rates is working, as reflected in the data the Fed closely follows: PCE and CPI (PCE is the Fed’s preferred gauge). However, we may note that there are many companies out there that have still reported significant consumer demand for their products and services. This is a true sign that the soft landing that the media agencies have so frequently spoken about is working.
As of June 2024, the latest data shows that the Core PCE, which excludes food and energy, has increased by 2.6% year-over-year. This marks a slight decline from the 2.8% increase observed in May 2024. The general PCE price index also experienced a year-over-year increase of 2.6% in May 2024, down from 2.7% in April 2024. This data combined further reflects a slight moderation in inflationary pressures. The next release of the PCE and Core PCE data is scheduled for July 26, 2024. This release will provide updated figures for June 2024.
Jobs & Unemployment
While unemployment has increased slightly, and the narrative at the Federal Reserve remains that this might be the case for the months to come. I firmly believe that companies continue to remain confident in the consumer and US monetary policy, that jobs data remains at the current pace for the months to come through end of 2024.
Most recently, total nonfarm payrolls increased by 206,000 (June 2024), and the unemployment rate changed little at 4.1%.
Central Banks Around the World
At the opening panel of the ECB Forum on Central Banking last week, leaders of central banks across the world, including the European Central Bank, Central Bank of Brazil, and Chairman Powell of our own Federal Reserve Bank reiterated and emphasized letting the data guide monetary policy. This message could be heard all across the board. I am confident that Chairman Powell remains empowered to let markets do as they “do”, while keeping a keen eye to it’s dual mandate of maximum employment and price stability. The conversations on the Street (Wall Street) remain that the Federal reserve is expected to decrease interest rates at least once before the year ends. While this narrative is something that I find solace in, I am not worried nor am I hoping for this cut. If it happens, great! However, I am confident in our current stance that the state of the markets will continue to power forward through the end of the year. If we look at history, time and time again, the telling is that the decrease in rates is almost always an antidote to a slowing economy that needs a heavy spark. I do not believe that our economy is slowing at a pace that calls for that type of accommodative monetary policy. Doing so too early carries the risk of creating an economic environment that could further provoke an increase in inflationary pressures once again.
Federal Deficit & Fiscal Policy
Although I don’t want to dive too much into the fiscal policy side of things, it’s important to note that they too can have an affect on an economy.
In specifically looking at the United States, the federal deficit for fiscal year (FY) 2023 was approximately $1.7 trillion. This was an increase of $320 billion compared to the previous year's deficit of $1.375 trillion. As a percentage of GDP, the deficit for FY 2023 was 6.3%, up from 5.4% in FY 2022.
As of May 2024, the U.S. federal deficit for fiscal year 2024 was approximately $1.2 trillion. This figure was slightly higher than the same period in the previous fiscal year. The monthly deficit for May 2024 was $347 billion, which was $107 billion more than the deficit recorded in May 2023.
The key factors contributing to this deficit include increased spending on disaster loans, higher net interest outlays due to rising interest rates, and elevated costs for Social Security and Medicare. Despite increased tax revenues from individual and corporate income taxes, overall expenditures still continue to outpace revenues. The entire Monthly Treasury Statement can be found here.
There’s no question that fiscal policy will be a conversation for the upcoming presidential election in November. Federal Reserve Chairman Powell has refused to speak about this issue, however he has emphasized that the debt burden does pose a potential risk for the future of the US economy. Larger debt tends to burden an economy’s forward path. In future periods, the elected officials of our country will inevitably have to exercise the responsibility factor and reduce our load or face consequences that could veer an economy downward.
I want to thank you for joining me on this quarter’s economic update. If you have further questions about where we’re headed as an economy, or are considering Portafolio Capital Management in your search for a new money manager or investment adviser, I invite you to schedule 15-minutes with us using the link below. I look forward to what the next quarter will bring in the months ahead, and as always, take care of yourselves and each other.
Best,
Mauricio Sanchez
Portfolio Manager & Chief Investment Officer
Have a question?
We invite you to submit your questions via email at mau@portafoliocapital.com.
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Fact of the Week:
First Woman on the NYSE: Muriel Siebert, also known as "Mickie," was the first woman to own a seat on the New York Stock Exchange in 1967. Her perseverance paved the way for greater gender equality on Wall Street.
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