With fresh inflation data indicating a change in tune for the current narrative and the consumer backdrop, now is the perfect time to keep you updated on the latest developments.
Major U.S. equity indexes traded higher last week as investors interpreted soft June consumer pricing inflation data. Notably, the Dow Jones Industrial Average led the way among major indexes, closing the week just shy of its record high made back on May 20th. The Dow’s leadership came just as earnings season got underway.
Tallying the week, the S&P 500 rose by 0.86%, the Nasdaq 100 decreased by 0.30%, and the Dow Jones Industrial Average gained 1.59%.
Consumer Price Index: Monthly Decline
June consumer pricing actually fell on a monthly basis, with monthly CPI data showing a 0.1% monthly decrease from May, two ticks lower than the Dow Jones estimate for a 0.1% monthly increase. Great news for the interest rate cut case! Year-over-year, data showed a 3.0% increase, the lowest level in more than three years.
A 3.8% slide in gasoline pricing helped to tame the inflation reading, and even more good news was evident, as shelter and food costs were only 0.2% higher over a month ago. While still sticky, shelter inflation showed some signs of potential cooling, with the lowest monthly jump in three years encouraging interest rate-cutting hopeful bulls.
June Core CPI (which removes more volatile food and energy from the metric) also cooled more than expected, showing a yearly 3.3% gain, down from May’s 3.4% gain. On a monthly unrounded basis, it was the lowest reading since January 2021. It is safe to say that market bulls loved this aspect of things!
This reading came after the previous two readings for April and May came in below analyst estimates. It is unknown whether the trend will continue, of course, and what the market will do with this new information.
Producer Price Index: Warm
After the soft CPI print on Wednesday created some investment euphoria, Friday gave us June Producer Price Index (PPI) data, which ran hotter than estimates. Data showed wholesale pricing rose 0.2% in June, higher than the 0.1% Dow Jones estimate.
Looking at yearly data, wholesale data for June increased by 2.6%. So, while consumer pricing was lower, the wholesale pricing data was a bit warm. No celebrations just yet!
Services pricing contributed to the rise in overall producer pricing – showing a 0.6% monthly gain that accounted for around three-quarters of the overall wholesale pricing gain.
Rate Cut Aspirations
Hopes for Fed rate cuts are growing. And now, with solid CPI evidence backing such an action, probabilities of a September cut increased by the close of last week, showing a 92.4% chance of a Fed rate cut in September versus a 77.7% chance seven days prior (07/05), according to the CME FedWatch Tool.
Markets expect the Fed to leave rates unchanged at the upcoming July meeting on 07/31, with a 95.3% probability as of last week’s market close.
So, the softer-than-expected CPI data has boosted the probability of cuts last week, and recent softening consumer sentiment data surely factored into the increased probabilities.
Traders and investors will be paying attention to Federal Reserve Chair Jerome Powell’s speech on Monday and retail sales data on Tuesday for additional clues or confirmations on a softening economy and consumer.
Consumer Sentiment Dips
Last week, we got the latest from the University of Michigan’s Consumer Sentiment survey, which showed an eight-month-low in the reading.
Data showing economic metrics slowing/weakening is what the Fed and market bulls want. So, the softer the data is, the better for rate-cutting bulls — at least for now!
We will continue to monitor sentiment and the narratives that come along with it.
Small Caps Surge
Courtesy of CPI data, we saw the Russell 2000 Small Cap index rise steadily last week, with most of the gains coming right after the CPI release.
While lagging behind the major indexes year-to-date, this index seems to have shown value, with it adding 6.0% last week. Should interest rates fall, smaller firms that require more capital for operations could benefit.
Style Shift
Growth stocks have dominated over value stocks for an extended period.
However, last week, we saw value and large-cap dividend payers catch a bid, as investors shied away from tech, tech, tech.
All the while, the Dow led the way among the major indexes (Russell 2000 aside). It was a week of value plays and catch-up.
Let’s state the obvious:
Given these realities, a narrative shift away from the norm of the recent extended period could be in the cards – worthy food for thought.
The Week Ahead
This week is quieter news-wise, as markets will continue to digest last week’s inflation data while looking for clues from the Fed in Chair Powell’s comments on Monday.
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