Summer Concern | July 2, 2021 | FFS

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Markets rose steadily all week. Does this bode well for the summer months, or should we be concerned?

Monday

Markets were mostly up on Monday. Investor sentiment was buoyed by an announcement from the largest US banks. They announced that they will resume dividends as the Federal Reserve Bank (FRB) has lifted the moratorium.

Last year’s stress test result in healthy balance sheets, however, to be safe, the FRB had Banks suspend dividends. After this year’s stress test the FRB announced a return to dividends would be permitted.

Tuesday

The S&P 500 rose to an all-time high again on Tuesday, albeit a meager gain. In a continuation from Monday the Small Cap markets again shed weight while the large indices continued to gain. CB Consumer Confidence unexpectedly jumped to a pandemic high of 127.3.

Wednesday

The S&P 500 continued its record setting gains on Wednesday. Pending home sales jumped in June, however there are underlying indicators showing the housing market is slowing down.

Thursday

The fresh record highs each day continued for the S&P 500. The S&P was not alone as all major indices pointed north on Thursday. There was much optimism on the job front as early data looked good. Friday brings the full jobs report.

Friday

Markets jumped on Friday. The S&P 500 rose 0.8% on the day, with only the Small Cap markets retreating. While the unemployment rate crept up in June to 5.9% (from 5.7%), the private payroll adds were impressive. The increase in the unemployment rate post-recession is not surprising. Those who were not looking for work begin to rejoin the job market and increase this measure of unemployment.

Conclusion

Markets rose nicely for the week. The S&P 500 gained 71.64 points, or 1.67% on the week. More impressive was perhaps the sustained run of growth across the entire week. Although early in the week the movements were modest the sustained upward trend is a positive signal for investor mentality. The struggle is that we are moving into the summer months where volumes tick down and volatility can tick up.