Stocks concluded last week on a hot streak as softer-than-expected inflation data fueled investor optimism around interest rate cuts.
The Nasdaq Composite (^IXIC) rose more than 3% while the S&P 500 (^GSPC) popped nearly 1.5%. The S&P 500 ended the week above 5,400 for the first time ever. The Nasdaq and S&P 500 both closed at record highs for four straight days. Meanwhile, the Dow Jones Industrial Average (^DJI) slid more than 0.7%.
A quieter week ahead will greet investors, with no major corporate news expected and the May retail sales report leading the economic calendar. Updates on activity in the manufacturing and services, sectors as well as weekly jobless claims, will also be in focus.
Markets will be closed on Wednesday for the Juneteenth holiday.
Inflation moving back in the right direction
The May Consumer Price Index (CPI) showed “core” CPI, which excludes volatile food and energy categories, increased by 0.2% month over month, the lowest reading since June 2023. Meanwhile, the “core” Producer Price Index (PPI) was unchanged in May from the prior month, below economists’ expectations for a 0.3% increase.
Economists believe all this points to a positive reading of the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month.
Bank of America US economist Stephen Juneau wrote Thursday’s PPI supports his view that “disinflation is the most likely path forward” and points to an “A+ report” for May core PCE. BofA estimates core PCE increased 0.16% month over month in May.
“The May CPI and PPI data are favorable for our view that the Fed will be reducing its policy rate later this year,” Juneau wrote. “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.”
He added, “An easing cycle that begins in September remains a possibility, particularly if shelter inflation were to moderate further in the next couple of months.”
‘Stick the landing’
Inflation is declining and economic growth slowing, but the Fed sees just one interest rate cut this year. A growing number of Wall Street economists are nervous the central bank may be walking too fine of a line with its most restrictive interest rate policy in more than two decades.
The fear among those economists is that there are already signs of softening in the economy, like a pickup in the unemployment rate, that could rapidly worsen if the Fed holds rates high for too long. That’s why investors will closely watch the initial weekly jobless claims release on Thursday morning. In the most recent release last week, weekly jobless claims unexpectedly hit 242,000, marking a 10-month high.
Allianz chief economic adviser Mohamed El-Erian told Yahoo Finance the balance of risks for the Fed if it waits to cut in December “is in favor of them being too late.”
Renaissance Macro’s head of economics Neil Dutta wrote in a note to clients that there is plenty of reason to believe further disinflation remains in the pipeline. Dutta argues this will call for a shift in the Fed’s rhetoric. The risk, Dutta says, is if the Fed doesn’t shift from its current stance.
“At the end of the day, unemployment is up and core inflation is down,” Dutta wrote. “The policy implication of that is clear … Time to get on with it and stick the landing.”
Retail reading
A key reading on how consumers are holding up amid higher rates is expected on Tuesday with the monthly retail sales report for May.
Economists expect that retail sales increased 0.3% from the prior month, which would mark a rebound in spending after sales unexpectedly came in flat in April.
“We suspect consumption is headed for a more modest pace of growth in the second half of the year,” Wells Fargo’s team of economists led by Jay Bryson wrote in a note to clients on Friday. “The personal saving rate has turned lower, consumer credit growth has slowed as delinquencies have increased, and growth in real disposable income has faded amid a moderating labor market.”
The economists added, “These mounting headwinds have weighed on discretionary spending, which will likely keep a lid on retail sales growth in the coming months.”
A bull market tailwind returns
After a rough start to 2024, the latest inflation data may very well add fuel to the current stock market rally.
“Inflation falling continues to be one of the primary factors behind the bull market in stocks,” Julian Emanuel, who leads Evercore ISI’s equity, derivatives, and quantitative strategy, wrote in a note to clients.
The S&P 500 (^GSPC) and Nasdaq (^IXIC) hit four straight record closes last week as investors digested softer-than-expected inflation readings for both consumer and wholesale prices. The print helped markets remain optimistic on two interest rate cuts this year, despite the median forecast from Federal Reserve officials favoring one cut in its Summary of Economic Projections (SEP) on June 12.
UBS Investment Bank’s chief US equity strategist Jonathan Golub, who holds one of the highest S&P 500 year-end targets on Wall Street at 5,600, believes this week’s inflation data, and what it could mean for eventual interest rate cuts, “provide the potential for even greater upside” to his year-end outlook.
