Stocks closed on a hot streak last week as softer-than-expected inflation data fueled investor optimism about rate cuts.
The Nasdaq Composite (^IXIC) rose more than 3%, while the S&P 500 (^GSPC) fell almost 1.5%. The S&P 500 ended the week above 5,400 for the first time. The Nasdaq and the S&P 500 both closed at record highs for four days in a row. Meanwhile, the Dow Jones Industrial Average (^DJI) fell more than 0.7%.
Investors will see a quieter week, with no major corporate news expected and the May retail sales report leading the economic calendar. Updates on manufacturing and services sector activity, sectors and weekly unemployment claims will also be a focus.
The markets are closed on Wednesdays for the June bank holiday.
Inflation is moving back in the right direction
May’s Consumer Price Index (CPI) showed the ‘core’ CPI, which excludes volatile food and energy categories, rising 0.2% month-on-month, the lowest since June 2023. Meanwhile, the ‘core ‘ producer price index (PPI) unchanged in May from the previous month, lower than economists’ expectations for a 0.3% increase.
Economists believe this all points to a positive reading for the Fed’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month.
Bank of America economist Stephen Juneau wrote that Thursday’s PPI supports his view that “disinflation is the most likely path forward” and points to an “A+ report card” for May’s core PCE. BofA estimates that core PCE rose 0.16% month-over-month in May.
“The May CPI and PPI data support our view that the Fed will cut its policy rate later this year,” Juneau wrote. “We believe that recent inflation data significantly reduces the likelihood that the Fed will have to raise rates and view labor market data as indications that the likelihood of rapid rate cuts is also low.”
He added: “An easing cycle starting in September remains a possibility, especially if inflation were to ease further in the coming months.”
‘Stick the Landing’
Inflation is declining and economic growth is slowing, but the Fed sees only one rate cut this year. A growing number of Wall Street economists are concerned that the central bank may be taking too sharp a line with its most restrictive interest rate policy in more than two decades.
The fear among these economists is that there are already signs of the economy weakening, such as a rise in unemployment, which could quickly worsen if the Fed keeps rates high for too long. That’s why investors will be keeping a close eye on Thursday morning’s first weekly release of unemployment claims. In the most recent release last week, weekly unemployment claims unexpectedly reached 242,000, the highest in ten months.
Mohamed El-Erian, chief economic adviser at Allianz, told Yahoo Finance that the risks for the Fed if it waits to make cuts in December “are in favor of being late.”
Neil Dutta, head of economics at Renaissance Macro, wrote in a note to clients that there is ample reason to believe further disinflation remains in the pipeline. Dutta argues that this will require a change in Fed rhetoric. According to Dutta, the risk arises if the Fed does not deviate from its current position.
“Ultimately, unemployment rose and core inflation fell,” Dutta wrote. “The policy implication of that is clear… Time to go ahead and stick the landing.”
Read retail
A key update on how consumers are holding up amid higher rates is expected Tuesday, along with the monthly retail sales report for May.
Economists expect retail sales to have risen 0.3% from the previous month, which would mark a recovery in spending after sales were unexpectedly 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 savings rate has fallen, consumer credit growth has slowed as payment delinquencies have increased, and real disposable income growth has weakened amid a moderating labor market.”
The economists added: “These mounting headwinds have weighed on discretionary spending, which is likely to limit retail sales growth in the coming months.”
A bull market tailwind is returning
After a rocky start to 2024, the latest inflation data could very well add fuel to the current stock market rally.
“Falling inflation remains one of the key drivers of the bull market in equities,” Julian Emanuel, who heads 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 numbers for both consumer and wholesale prices. The print helped markets remain optimistic about two rate cuts this year, despite the average forecast from Federal Reserve officials favoring one cut in the June 12 Summary of Economic Projections (SEP).
Jonathan Golub, chief U.S. equity strategist at UBS Investment Bank, which has one of the highest closing targets for the S&P 500 on Wall Street at 5,600, believes this week’s inflation data, and what it could mean for any rate cuts, “ offering the potential for even greater upside” from its year-end outlook.
Weekly calendar
Monday
Economic data: Empire production, June (-13 expected, -15.6 earlier)
Income: Lennar (LEN)
Tuesday
Economic data: Retail sales, month-on-month, May (+0.3% expected, 0% prior); Retail sales excluding cars and gasoline, May (+0.3% expected, -0.1% earlier); Industrial production month-on-month, May (0.4% expected, 0% earlier)
Income: KB Home (KBH)
Wednesday
Economic data: NAHB housing market index, June (45 expected, 45 previously); MBA mortgage applications, week ending June 14 (+15.6%)
Income: The markets are closed for the June bank holiday.
Thursday
Economic data: Initial unemployment claims, week ending June 15 (previously 242,000); Housing starts month-on-month, May (+1.1% expected, +5.7% earlier); Construction permits month-on-month, May (+1.4% expected, -3% earlier); Philadelphia Business Outlook, June (4.5 expected, 4.5 earlier); Import prices, month-on-month, April (+0.2% expected, +0.4% earlier)
Income: Accenture (ACN), Kroger (KR)
Friday
Economic data: Leading index, May (-0.3% expected, -0.6% earlier); S&P Global US manufacturing PMI, preliminary June (51 expected, 51.3 previously); S&P Global US services PMI, preliminary June (53.4 expected, 54.8 previously); S&P Global US composite PMI, provisional June (54.5 previously)
Income: CarMax (KMX), FactSet (FDS)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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