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What to know this week
Stocks ended last week higher as weaker-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) exploded by almost 1.5%. The S&P 500 ended the week above 5,400 for the first time. The Nasdaq and S&P 500 closed at record highs for four consecutive days. Meanwhile, the Dow Jones Industrial Average (^DJI) fell more than 0.7%.
A calmer week ahead will greet investors, with no major corporate news expected and the May retail sales report topping the economic calendar. Updates on activity in the manufacturing and services sectors, as well as weekly unemployment benefit claims, will also be in focus.
Markets will be closed on Wednesday due to the June bank holiday.
Inflation heading back in the right direction
The Consumer Price Index (CPI) for May showed The “core” CPI, which excludes volatile food and energy categories, rose 0.2% month-over-month, the lowest reading since June 2023. Meanwhile, the “core” Producer Price Index (PPI) was unchanged in May compared to the previous month, below economists’ expectations of an increase of 0.3%.
Economists believe this all 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 that 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 that core PCE increased 0.16% month over month in May.
“The May CPI and PPI data are supportive of our view that the Fed will lower its key rate later this year,” wrote Juneau. “We see recent inflation data greatly reducing the likelihood that the Fed will have to raise rates, and we see labor market data as an indication that the likelihood of rapid rate cuts is also low.”
He added: “An easing cycle beginning in September remains a possibility, especially if shelter inflation moderates further in the coming months.”
‘Make the landing’
Inflation is falling and economic growth is slowing, but the Fed expects only one interest rate cut this year. A growing number of Wall Street economists worry that the central bank may be treading too fine a line with its tightest interest rate policy in more than two decades.
The fear among these economists is that there are already signs of a slowdown in the economy, such as a recovery in the unemployment rate, which could worsen quickly if the Fed keeps rates high for too long. That’s why investors will be closely watching the initial weekly unemployment claims release on Thursday morning. In last week’s latest release, weekly claims for unemployment benefits unexpectedly reached 242,000, marking a 10-month high.
The story continues
Chief Economic Advisor at Allianz, Mohamed El-Erian told Yahoo Finance The balance of risks for the Fed if it waits for cuts in December “is in favor of them coming too late.”
Renaissance Macro’s head of economics, Neil Dutta, wrote in a note to clients that there are many reasons to believe that more disinflation remains in the works. Dutta argues that this will require a change in the Fed’s rhetoric. The risk, says Dutta, is if the Fed does not change its current position.
“Ultimately, unemployment rose and core inflation fell,” Dutta wrote. “The political implications of this are clear… It’s time to move forward and set the bar.”
The New York Stock Exchange airs on Wednesday, June 12, 2024, in New York. (AP Photo / Peter Morgan) (ASSOCIATED PRESS)
Retail Reading
An important reading on how consumers are behaving amid higher rates is expected on Tuesday with the monthly retail sales report for May.
Economists expect retail sales to have increased 0.3% from the previous month, which would mark a rebound in spending after sales dropped unexpectedly in April.
“We suspect that consumption is heading toward a more modest pace of growth in the second half of the year,” the Wells Fargo team of economists, led by Jay Bryson, wrote in a note to clients on Friday. “The personal savings rate declined, consumer credit growth slowed as delinquencies rose, and real disposable income growth faded in a subdued labor market.”
The economists added: “These growing headwinds have weighed on discretionary spending, which will likely limit retail sales growth in the coming months.”
A Bull Market Tailwind Returns
After a difficult start to 2024The latest inflation data could very well add fuel to the current stock market rally.
“Falling inflation continues to be one of the main factors behind the bull market in equities,” wrote Julian Emanuel, who leads Evercore ISI’s quantitative, equities and derivatives strategy, in a note to clients.
The S&P 500 (^GSPC) and Nasdaq (^IXIC) to knock four consecutive records close last week as investors digested softer-than-expected inflation readings for consumer and wholesale prices. The print helped markets remain optimistic about two interest rate cuts this year, despite Federal Reserve officials’ median forecast favoring a cut in their Summary of Economic Projections (SEP) on June 12.
UBS Investment Bank chief U.S. equity strategist Jonathan Golub, who holds one of the S&P 500’s biggest year-end targets on Wall Street, with 5,600believes this week’s inflation data, and what that could mean for eventual interest rate cuts, “provides the potential for even greater upside” to its outlook for the end of the year.
Weekly Calendar
Monday
Economic data: Empire Making, June (-13 expected, -15.6 previous)
Earnings: Lennar (LEN)
Tuesday
Economic data: Retail sales, month-over-month, May (+0.3% expected, 0% previously); Retail sales excluding autos and gas, May (+0.3% expected, -0.1% previously); Month-over-month industrial production, May (0.4% expected, 0% previous)
Earnings: KB home page (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 due to the June holiday.
Thursday
Economic data: Initial unemployment claims, week ending June 15 (previously 242,000); Housing begins month-to-month, May (+1.1% expected, +5.7% previous); Month-over-month building permits, May (+1.4% expected, -3% previous); Philadelphia Business Outlook, June (4.5 expected, 4.5 previous); Import prices, month over month, April (+0.2% expected, +0.4% previously)
Earnings: Accenture (ACN), Kroger (KR)
Friday
Economic data: Main index, May (-0.3% expected, -0.6% previously); S&P US Global Manufacturing PMI, June preliminary (51 expected, 51.3 previous); S&P Global US Services PMI, June preliminary (53.4 expected, 54.8 previous); US S&P Global Composite PMI, June preliminary (54.5 before)
Earnings: CarMax (KMX), Fact Set (FDS)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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