Last week, stocks concluded on a high note, as investors’ optimism regarding interest rate reduction was bolstered by inflation data that was less than anticipated.
While the S&P 500 (^GSPC) experienced a nearly 1.5% increase, the Nasdaq Composite (^IXIC) increased by over 3%. For the first time in history, the S&P 500 concluded the week above 5,400. For four consecutive days, the Nasdaq and S&P 500 both closed at record highs. In the interim, the Dow Jones Industrial Average (^DJI) experienced a decline of over 0.7%.
The economic calendar will be dominated by the May retail sales report, and investors can anticipate a relatively tranquil week. No significant corporate news is anticipated. The focus will also be on weekly unemployment claims and updates on activity in the manufacturing and services sectors.
Markets will be closed on Wednesday in observance of the Juneteenth holiday.
Inflation is returning to its proper trajectory.
The “core” Consumer Price Index (CPI), which excludes volatile food and energy categories, increased by 0.2% month over month in May, the lowest reading since June 2023. In May, the “core” Producer Price Index (PPI) remained unchanged from the previous month, which was below the 0.3% increase that economists had anticipated.
According to economists, this indicates that the Federal Reserve’s preferred inflation barometer within the Personal Consumption Expenditures (PCE) index will exhibit a favorable reading later this month.
Bank of America Stephen Juneau, a US economist, stated that the PPI from Thursday “corroborates his belief that disinflation is the most probable course of action” and anticipates a “A+ report” for the May core PCE. In May, BofA anticipates that core PCE increased by 0.16% month over month.
“The May CPI and PPI data are favorable for our view that the Fed will be reducing its policy rate later this year,” Juneau reported. “We see recent inflation data as greatly reducing the likelihood that the Fed has to raise rates and view labor market data as indicating that the probability of fast rate cuts is also low.”
According to him, “An easing cycle that begins in September remains a possibility, particularly if shelter inflation were to moderate further in the next couple of months.”
The Federal Reserve anticipates only one interest rate reduction this year, despite the fact that inflation is decreasing and economic development is slowing. A growing number of Wall Street economists are concerned that the central bank may be exceeding its authority with its most restrictive interest rate policy in over two decades.
Those economists are concerned that the economy is already showing signs of softening, such as an increase in the unemployment rate, and that these signs could swiftly deteriorate if the Federal Reserve maintains high rates for an extended period. This is the reason why investors will closely monitor the initial weekly unemployment claims release on Thursday morning. The most recent release last week marked a 10-month high in weekly unemployed claims, which unexpectedly reached 242,000.
Mohamed El-Erian, the chief economic counsel of Allianz, stated to Yahoo Finance that the Federal Reserve’s risk-benefit analysis suggests that delaying a December rate cut would result in a delay that is “too late.”
In a note to clients, Neil Dutta, Renaissance Macro’s chief of economics, stated that there is ample evidence to suggest that additional disinflation is imminent. Dutta contends that this will necessitate a change in the Federal Reserve’s rhetoric. Dutta asserts that the Fed’s current posture poses a risk.
“At the end of the day, unemployment is up and core inflation is down,” Dutta concluded. “The policy implications of that are evident.” It is time to proceed and ensure a successful outcome.
A bull market impetus is present.
The current stock market rally may be further bolstered by the most recent inflation data, which follows a challenging start to 2024.
Julian Emanuel, the head of Evercore ISI’s equity, derivatives, and quantitative strategy, stated in a note to clients that inflation’s decline remains one of the primary factors contributing to the stock market’s bull market.
Last week, the S&P 500 (^GSPC) and Nasdaq (^IXIC) achieved four consecutive record closes as investors assessed inflation readings that were less than anticipated for both consumer and wholesale prices. Despite the median forecast from Federal Reserve officials favoring one cut in its Summary of Economic Projections (SEP) on June 12, the print assisted markets in maintaining their optimism regarding two interest rate cuts this year.
Jonathan Golub, the chief US equity strategist at UBS Investment Bank, maintains one of the highest year-end targets for the S&P 500 on Wall Street at 5,600. He is of the opinion that the inflation data released this week, and the potential implications for future interest rate reductions, “offer the potential for even greater upside” to his year-end outlook.
Weekly calendar
Monday
Economic data: Empire manufacturing, June (-13 expected, -15.6 prior)
Earnings: Lennar (LEN)
Tuesday
Economic data: Retail sales, month-over-month, May (+0.3% expected, 0% previously); Retail sales ex auto and gas, May (+0.3% expected, -0.1% previously); Industrial production month-over-month, May (0.4% expected, 0% prior)
Earnings: KB Home (KBH)
Wednesday
Economic data: NAHB housing market index, June (45 expected, 45 previously); MBA Mortgage Applications, week ending June 14 (+15.6.%)
Earnings: Markets are closed for the Juneteenth holiday.
Thursday
Economic data: Initial jobless claims, week ending June 15 (242,000 previously); Housing starts month-over-month, May (+1.1% expected, +5.7% prior); Building permits month-over-month, May (+1.4% expected, -3% prior); Philadelphia Business Outlook, June (4.5 expected, 4.5 prior); Import prices, month-over-month, April (+0.2% expected, +0.4% previously)
Earnings: Accenture (ACN), Kroger (KR)
Friday
Economic data: Leading index, May (-0.3% expected, -0.6% previously); S&P Global US manufacturing PMI, June preliminary (51 expected, 51.3 prior); S&P Global US services PMI, June preliminary (53.4 expected, 54.8 prior); S&P Global US composite PMI, June preliminary (54.5 prior)
Earnings: CarMax (KMX), FactSet (FDS)
Shayne Heffernan
