The Rally Meets Reality

The Headline Illusion Continues

This week, we discuss the PCE report, new home sales, GDP, and PMI. Inflation continues to run well above the Federal Reserve's target. While personal income growth appeared strong, much of the increase reflected a one time government payment. Adjusting for this temporary boost, the savings rate fell to just 2.8%, suggesting that many consumers are increasingly stretched. New home sales surprised to the downside, while the median months for sale rose to its highest level since 2021, underscoring further weakness in the housing market. Although the final estimate of first quarter GDP was revised higher, the increase was driven primarily by a decline in imports rather than stronger domestic demand. More concerning, consumption growth was revised down from 1.0% in the initial estimate to just 0.5% in the final estimate, adding to evidence of a slowing consumer sector. Meanwhile, the headline manufacturing PMI appeared robust, but much of the strength reflected firms building inventories in response to supply concerns and policy uncertainty. Manufacturers also reported layoffs amid weakening demand and elevated uncertainty. Taken together, while several headline figures suggested resilience, the underlying details painted a considerably weaker picture of the economy.

Warsh's Withdrawing Guidance

This week, we discuss recent housing market releases and the Federal Open Market Committee's latest decision under its new chair, Kevin Warsh. Housing starts fell to their lowest level since April 2020, at the onset of the Covid 19 pandemic. Much of the decline was driven by multifamily construction, a notoriously volatile component of the data. Even so, the report is consistent with broader evidence that the housing market continues to lose momentum. Mr. Warsh also held his first press conference as Federal Reserve chair. Among the more visible changes were a shorter policy statement, the decision to withhold his own projection from the Summary of Economic Projections, and a refusal to provide forward guidance. Beneath these procedural changes lies a potentially more significant shift in leadership style. Mr. Warsh has emphasized that policy decisions will emerge from what he describes as a "good family fight" while reaffirming the central bank's commitment to achieving its inflation target. Although a less transparent approach may ultimately lead to better policy outcomes, the immediate effect is to introduce an additional layer of uncertainty into an economy that already faces no shortage of it.

One Small Step for SpaceX, One Giant Leap for Speculation?

This week, we discuss rising inflation, the upcoming Federal Open Market Committee meeting, and the much anticipated SpaceX initial public offering. Consumer prices continued to accelerate in May, with headline CPI rising 4.2% from a year earlier and core CPI increasing 2.9%. Alternative measures of inflation, including median, trimmed mean, and sticky CPI, also pointed to broadening price pressures. Producer prices rose at their fastest pace since 2022, prompting economists to revise their forecasts for the Federal Reserve's preferred inflation gauge, the Personal Consumption Expenditures index, higher. The renewed inflationary pressure complicates the outlook for monetary policy. With inflation moving further from the Federal Reserve's target, policymakers may find it increasingly difficult to justify lower interest rates and could instead be forced to maintain or even tighten policy. We examine the forces shaping the inflation outlook and discuss what investors should expect from the next FOMC meeting under the leadership of Kevin Warsh. We also turn to the SpaceX initial public offering and the broader state of financial markets. Investor enthusiasm for high growth companies remains intense, even as SpaceX, Anthropic, and OpenAI continue to generate substantial losses. The willingness of investors to assign extraordinary valuations to unprofitable businesses evokes uncomfortable comparisons with the technology boom of the late 1990s.

The Rally Meets Reality

In this episode, we discuss the latest labor market releases, deteriorating consumer balance sheets, and Friday's decline in equity markets. While payroll growth exceeded expectations and the unemployment rate held steady at 4.3%, the composition of employment gains, the timing of the Memorial Day holiday, and several other details within the report continue to suggest a less encouraging picture of the economy. Meanwhile, consumer debt continued to rise, with revolving credit balances, much of which consists of credit card borrowing, increasing at an annualized rate of 10% in April after rising 9% in March. These figures are particularly troubling given that the personal savings rate remains near historic lows and credit card delinquencies have climbed to levels not seen since the Global Financial Crisis. Consumers appear increasingly reliant on borrowing to sustain spending, a dynamic that has rarely ended well. Friday's sell off in equity markets served as a reminder of the fragility underlying the recent rally. Weaker than expected revenue guidance from Broadcom, renewed concerns about inflation, and rising expectations that the Federal Reserve may be forced to raise interest rates before year end all contributed to the decline.

Getting Better?

This week, we discuss downward revisions to GDP, persistent inflation and a renewed decline in the savings rate. Real GDP growth in the first quarter of 2026 was revised down from 2.1% to 1.6%, well below the consensus estimate of 2.2%. Meanwhile, inflation remained uncomfortably high. The PCE price index rose 3.8% from a year earlier, while core PCE increased 3.3%, both still far above the Federal Reserve’s 2% target. The same report offered little comfort on the consumer. Real disposable personal income fell 0.5%, consumption rose just 0.1%, and the savings rate dropped to its lowest level since the eve of the Global Financial Crisis.