Equity markets continued their surprising recovery in June. US stocks led the way, with both the S&P 500 and Russell 2000 posting healthy gains. The Russell outpaced the S&P 500, which is a reversal of trend, and an indicator of the recovery broadening. As a reminder, through May, much of the recovery was concentrated in a handful of larger, more tech-oriented companies. Abroad, markets also gained, but lagged the US.
In the fixed income markets, interest rates continued to gyrate based on the latest economic data and Fedspeak. Stronger economic data, mostly from the labor market, was generally met with upticks in interest rates along the treasury yield curve. Federal Reserve officials have continued to reiterate their “higher for longer” message on short-term interest rates. Market-based predictions of short-term rates now seem more in-line with the Fed’s forecast. Capital markets appear to be relatively stable, with high-yield issues gaining in June, but there are pockets of distress and areas of concern.
Inflation data remains elevated but appears to be trending slowly in the right direction. The most significant contribution was from household services, which is an estimate of rents that tends to lag observable real-time rents. Other components seem to be moving more in-line with the Fed’s inflation target. It is possible that the housing component experiences the most push-pull as interest rate policy evolves, as home prices tend to have a bond math component to them.
It has been interesting to observe the uptick in rates and the effects on the economy. To date, regional banking crisis notwithstanding, the impact has been somewhat muted. During the 2010’s, a lot of observers questioned the impact of low interest rates and quantitative easing on the real economy. Given the uptake in rates, and the relatively small impact observed thus far, it appears that they may have had a point. However, these policies tend to work with a lag and how long that point remains valid remains an open question.