Global equities have been a bit more mixed of late with Canadian and European equities weaker in recent weeks, though year-to-date gains remain respectable. Meanwhile the U.S. equity market continues to display strength, driven by the large cap technology sector. The rest of the U.S. market has not been as strong of late which is something worth monitoring given meaningful changes in market breadth can be a harbinger of future turns in the market. Below, we discuss some takeaways from the Federal Reserve update and recent U.S. economic developments.

 

The U.S. Federal Reserve chose to maintain its key policy rate at a two-decade high over the past week, in contrast to recent decisions by other central banks, such as those in Canada and Europe, who decided to cut interest rates. The Fed’s decision was widely anticipated, with investors instead focused on any guidance on future rate cuts and any updated economic projections. On the former, the Fed revealed that most policy makers now predict only one interest rate cut this year versus the three that were expected earlier. However, the average number of cuts that policy makers expect for 2025 and 2026 were revised higher (to four cuts from three for each year, respectively). In other words, the Fed anticipates it may not cut rates as soon as initially planned but may eventually play catch-up. Meanwhile, its average economic growth forecasts were left mostly unchanged, while expectations for unemployment and inflation were revised fractionally higher. In his comments, Chair Jerome Powell acknowledged that substantial progress has been made on inflation over the past two years, including some encouraging readings of late. However, he emphasized the committee needs to see more progress before considering any interest rate cuts.

 

The other key story in the U.S. in recent weeks has been the host of economic data that painted a bit of a mixed picture for the U.S. economy. On the inflation front, a few different measures of inflation for the month of May came in below expectations, marking a positive shift from the three consecutive months of higher-than-expected inflation witnessed earlier in the year. Meanwhile, manufacturing data for the month disappointed expectations, with production and new orders falling and remaining relatively weak. Offsetting this to some degree were services-based readings which continued to exhibit strength. The monthly employment report was also relatively strong, with the U.S. adding more jobs than expected. Nevertheless, the number of U.S. job openings continues to decline from remarkably high levels, and now sits at its lowest level in three years. This latter data point suggests the labour market has transitioned from one that was overheated just a few years ago to one that has come back into better balance.

 

Overall, the economic releases portray an economy that appears to be on the path, for now, to a soft-landing, where growth slows enough to bring inflation back to more appropriate levels without a significant rise in unemployment. That kind of outcome may be the preferred one for financial markets as it would promote some easing in future financial conditions (ie. lower interest rates) and a potential broadening in corporate earnings growth. Nevertheless, we believe that we remain in a window of time where the range of potential U.S. economic outcomes remains wider than normal given the significant change in interest rates that occurred over the past few years. It is our responsibility to be prepared for a range of scenarios and to make any necessary adjustments to portfolios as developments unfold.