Weekly Market Review: Stocks Near Record Highs Amid Favorable Inflation Data

Infotrading.io - The stock market wrapped up the previous week with significant gains, as encouraging inflation data led to investor optimism about potential interest rate cuts. The Nasdaq Composite (^IXIC) saw a substantial increase of more than 3%, while the S&P 500 (^GSPC) rose nearly 1.5%, ending the week above 5,400 for the first time ever. Both the Nasdaq and S&P 500 achieved record highs for four consecutive days. In contrast, the Dow Jones Industrial Average (^DJI) experienced a decline of over 0.7%.

Key Drivers

Inflation Data: The positive momentum in the stock market was largely driven by favorable inflation figures. The May Consumer Price Index (CPI) indicated that "core" CPI, which excludes the more volatile food and energy sectors, increased by just 0.2% month-over-month. This is the lowest reading since June 2023. Similarly, the "core" Producer Price Index (PPI) remained unchanged in May from the previous month, which was below economists' expectations of a 0.3% increase.

Economists believe that these figures suggest a positive reading for the Federal Reserve's preferred inflation gauge within the Personal Consumption Expenditures (PCE) index, expected later this month. Stephen Juneau, a US economist at Bank of America, indicated that the recent PPI data supports the view that disinflation is the most likely path forward, predicting an "A+ report" for May's core PCE. Bank of America estimates that core PCE increased by 0.16% month-over-month in May.

Federal Reserve Outlook: The favorable inflation data strengthens the case for potential interest rate cuts by the Federal Reserve. Juneau noted that the recent data significantly reduces the likelihood of the Fed raising rates further and indicates a low probability of rapid rate cuts due to current labor market conditions. He suggested that an easing cycle could begin in September, particularly if shelter inflation continues to moderate in the coming months.

Mohamed El-Erian, Allianz's chief economic adviser, expressed concerns that delaying rate cuts until December could result in the Fed being "too late." Renaissance Macro's head of economics, Neil Dutta, also highlighted the need for the Fed to adjust its rhetoric, noting that unemployment is up while core inflation is down, making it clear that it is time to "stick the landing."

Economic Insights

Unemployment and Jobless Claims: Despite the overall positive market sentiment, there are concerns about potential economic softening. The recent increase in the unemployment rate and a rise in initial jobless claims, which hit a 10-month high of 242,000, suggest underlying vulnerabilities in the economy. These indicators will be closely monitored, especially with the upcoming release of initial jobless claims data on Thursday.

Retail Sales and Consumer Behavior: On Tuesday, the monthly retail sales report for May will be released, providing important insights into consumer behavior amidst higher interest rates. Economists expect a 0.3% increase in retail sales from the previous month, marking a rebound after April's flat performance. Wells Fargo economists, led by Jay Bryson, noted several challenges, including a lower personal saving rate, slowed consumer credit growth, and increased delinquencies, which could constrain retail sales growth in the coming months. They predict a more modest pace of consumption growth in the second half of the year.

Market Performance and Projections

Bull Market Dynamics: The recent inflation data has added fuel to the ongoing stock market rally. Julian Emanuel of Evercore ISI emphasized that declining inflation remains a key driver of the bull market. Both the S&P 500 and Nasdaq reached four consecutive record closes last week, buoyed by optimistic inflation readings. Jonathan Golub, chief US equity strategist at UBS Investment Bank, who maintains a high year-end target of 5,600 for the S&P 500, believes the recent data could provide even greater upside potential.

Sector Performance: While the Nasdaq and S&P 500 soared, the Dow Jones Industrial Average (^DJI) fell by over 0.7%, indicating mixed performance across different market segments. Investors are cautiously optimistic, focusing on sectors that are likely to benefit from potential interest rate cuts and ongoing economic recovery.

Upcoming Economic Events

The week ahead is relatively quiet in terms of major corporate news, with the May retail sales report being the primary focus. Other notable economic data and events include updates on manufacturing and services sector activity and the weekly jobless claims report. Markets will be closed on Wednesday in observance of the Juneteenth holiday.

Monday:

• Economic Data: Empire Manufacturing Index for June, with expectations at -13, compared to -15.6 in the previous month.

• Earnings: Lennar (LEN)

Tuesday:

• Economic Data: Retail sales for May, expected to rise by 0.3% month-over-month; Retail sales excluding auto and gas, expected to increase by 0.3%; Industrial production for May, expected to grow by 0.4%.

• Earnings: KB Home (KBH)

Wednesday:

• Economic Data: NAHB Housing Market Index for June, expected at 45; MBA Mortgage Applications for the week ending June 14, with a prior increase of 15.6%.

• Markets closed for Juneteenth holiday.

Thursday:

• Economic Data: Initial jobless claims for the week ending June 15, with a prior reading of 242,000; Housing starts for May, expected to rise by 1.1%; Building permits for May, expected to increase by 1.4%; Philadelphia Business Outlook for June, expected at 4.5; Import prices for April, expected to rise by 0.2%.

• Earnings: Accenture (ACN), Kroger (KR)

Friday:

• Economic Data: Leading index for May, expected to decline by 0.3%; S&P Global US Manufacturing PMI for June, expected at 51; S&P Global US Services PMI for June, expected at 53.4; S&P Global US Composite PMI for June.

• Earnings: CarMax (KMX), FactSet (FDS)

The stock market's strong performance last week, driven by favorable inflation data, has set a positive tone for the week ahead. With key economic indicators such as retail sales and jobless claims on the horizon, investors will closely monitor these developments for further insights into the health of the economy and potential monetary policy adjustments by the Federal Reserve.

The overarching narrative remains one of cautious optimism, as declining inflation and the prospect of interest rate cuts bolster market confidence. However, the balance of risks, particularly regarding unemployment and consumer behavior, will be critical in shaping the market's trajectory in the coming months.