Last week’s economic signals were a mix of cautious optimism and renewed concern. While inflation saw a slight uptick in May, it still came in cooler than expected. Meanwhile, consumer sentiment experienced its largest monthly increase in over three decades, though consumers remain guarded about the economy’s path forward. As this data unfolded, the S&P 500 ended the week on a sour note, reflecting heightened anxieties stemming from geopolitical tensions.
Consumer Price Index
Inflation heated up for the first time in four months though it still came in cooler than expected. In May, the Consumer Price Index (CPI) rose 2.4%, a slight uptick from 2.3% in April but lower than the expected 2.5% growth. Month-over-month, prices edged up by 0.1%, a smaller increase than the expected 0.2% and a slowdown from April’s 0.2% rise. Core inflation, which excludes volatile food and energy prices, held steady near a four-year low of 2.8% in May, coming in below the forecast of 2.9%. Core prices were also up 0.1% on a monthly basis, less than the projected 0.3% increase and following April’s 0.2% uptick.
Driving the overall price increase in May were higher shelter costs and increased food costs. Additionally, medical car, motor vehicle insurance, household furnishing, personal care, and education also rose from the previous month. On the opposite end, the energy index declined with the recent drop in gas prices. Other categories that saw price declines include airline fares, used cars and trucks, new vehicles, and apparel.
Despite this welcome news of lower-than-expected inflation for consumers, the Federal Reserve is likely to maintain its cautious approach as it continues to wait and see if tariff-driven price increases will make its way through the data.
Michigan Consumer Sentiment
Consumer sentiment rose for the first time in six months as consumers appear to have settled from tariff and policy volatility from a few months ago. The Michigan Consumer Sentiment Index increased 8.3 points to 60.5 this month, its highest level since February but still on the historically low end. This represents a 15.9% increase from May’s final reading, the largest monthly increase in over thirty years, but an 11.3% drop from one year ago.
The current conditions index rose for the first time in six months while the expectations index increased for a second straight month. Notably, short and long run expected business conditions improved significantly as consumers believe tariff pressures are beginning to ease. With that said, consumers remain guarded about the economy’s trajectory and many of their views remain well below levels from six months ago.
Inflation expectations eased for both near and long term. Year ahead expectations cooled for the first time in seven months from 6.6% in May to 5.1% in June. Meanwhile, five-year expectations edged lower for a second consecutive month to 4.1%. Despite softening expectations this month, both series remain historically high, reflecting consumers’ beliefs that tariffs and trade policy will still impact prices in the future.
The Consumer Discretionary Select Sector SPDR ETF (XLY ) is tied to consumer sentiment.
Market Reactions
The S&P 500 fell 1.1% on Friday amid geopolitical tensions, resulting in a 0.4% loss for the week. As a result, the SPDR S&P 500 ETF Trust (SPY ) fell 0.3% last week. Meanwhile, the S&P Equal Weight Index was down 0.8% from the previous week and the Invesco S&P 500 Equal Weight ETF (RSP ) fell 0.7%.
The 10-year Treasury yield finished the week at 4.41%, while the 2-year note finished at 3.96%.
The CME FedWatch Tool currently shows a 99.8% likelihood that the Fed will hold rates steady at their meeting this week. Markets are pricing in two 25 basis point cuts for later this year coming at the September and December meetings. Additionally, two 25 basis point cuts are projected in 2026.
Economic Data in the Week Ahead
This week’s economic data will provide updates across a variety of sectors. On Tuesday, retail sales data for May will show the impacts of tariffs and related trade policy on consumer spending. Housing indicators released throughout the week will reveal how affordability challenges continue to shape the real estate market. Additionally, the Empire State and Philadelphia Fed manufacturing surveys, along with May’s data on national industrial production, will highlight both regional and national trends in the manufacturing and industrial sectors.
Originally published on Advisor Perspectives.
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