The pace of consumer inflation continued to soften. The core Consumer Price Index, which excludes food and energy, increased 2% year over year, matching a 15-month low. Core personal consumption expenditures (PCE), the Federal Reserve\u2019s (Fed) preferred inflation gauge, rose 1.6% year over year in April, below policymakers\u2019 2% target.<\/p>\n
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Wage and input pricing pressures faded. Average hourly earnings rose 3.1% year over year in May, an eight-month low. However, current wage growth is at a level that should continue to bolster consumer confidence without concerns of overheating. Growth in the core Producer Price Index (PPI), which excludes food and energy prices, fell to 2.4% year over year, its fourth straight decline.<\/p>\n
U.S. manufacturing deteriorated further. The Institute for Supply Management\u2019s (ISM) manufacturing Purchasing Managers Index (PMI), a gauge of U.S. manufacturing health, fell to its lowest point since October 2016. Markit\u2019s PMI ticked up slightly, according to preliminary June data, but the gauge remained less than a point away from contractionary territory (which is below 50). <\/p>\n
Consumer sentiment faltered, as the Conference Board\u2019s Consumer Confidence Index fell to its lowest level since 2017. However, heightened trade tensions didn\u2019t faze corporate sentiment. The National Federation of Independent Business\u2019s measure of business confidence climbed for a fourth straight month. Retail sales rose for a third straight month in May, while new orders for nondefense capital goods climbed. Year-over-year growth in both measures was tepid, suggesting long-term demand is slowing.<\/p>\n
Fed Language Shifts<\/strong><\/p>\n On June 18 the Fed chose to keep rates unchanged, but policymakers prepared investors in a measured fashion for an eventual policy shift [Figure 2]<\/strong>. The Fed dropped its \u201cpatient\u201d policy stance in the post-meeting announcement and instead reiterated Fed Chair Jerome Powell\u2019s June 4 comments that policymakers will \u201cact as appropriate to sustain the expansion.\u201d<\/p>\n Still, Powell emphasized in his post-meeting press conference that the U.S. economy is performing \u201creasonably well\u201d with solid economic fundamentals. The Fed kept its gross domestic product (GDP) growth projection unchanged at 2.1% for the year, in line with average output growth in this expansion.<\/p>\n Financial markets are now overwhelmingly pricing in a July rate cut, with fed fund futures implying a 100% chance of lower rates at the Fed\u2019s July meeting.<\/p>\n![](\"\/wp-content\/uploads\/sites\/4\/2019\/07\/MarketInsightMonthly-07102019no.2.jpg\")
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