Weekly Market Vibes

Stocks rise on cooling inflation signals

Stocks recorded a week of strong gains, as investors welcomed data showing a continued cooldown in inflation. The S&P 500 Index ended the week 6.50% below the all-time intraday high it established in early 2022. The Nasdaq Composite recorded an even stronger gain but remained 12.94% below its record peak. Standout performers within the S&P 500 included casino operators, along with regional banks and asset managers. Laggards included some major pharmaceutical firms and the typically defensive consumer staples sector. Friday saw the unofficial start of earnings season, as bank giants Citigroup, JPMorgan Chase, Goldman Sachs, and Wells Fargo reported second-quarter results.

The signal event of the week appeared to be Wednesday’s release of consumer price index (CPI) inflation data. Both headline and core (excluding food and energy prices) inflation rose 0.2% in June, a tick below expectations. The annual increase in headline inflation slowed to 3.0%, its slowest pace since March 2021, while core inflation slowed to 4.8%, the slowest since October 2021.

Producer price index (PPI) inflation data, released Thursday, was arguably even more encouraging. Headline producer prices rose only 0.1% over the year ended in June, nearing deflation territory. Core producer prices rose 2.4% over the period, but near the Federal Reserve’s overall inflation target of 2.0% and at their slowest pace since January 2021.

Consumer sentiment gauge sees biggest monthly gain since 2006

Other data released during the week suggested that the economy might be able to skirt a recession as inflation cooled, resulting in a “soft landing.” On Friday, markets appeared to get a boost from the University of Michigan’s gauge of current consumer sentiment, which rose well above expectations to 72.6, its highest level in nearly two years, and marked its largest monthly advance since 2006. Consumers surveyed reported better labor market conditions and falling inflation as reasons for improved optimism. Weekly jobless claims, reported Thursday, fell back more than expected, to 237,000, reversing almost all of the previous week’s jump.

10-year U.S. Treasury note yield falls back below 4%

U.S. Treasury prices jumped as longer-term yields retreated on the positive inflation data, with the yield on the benchmark 10-year note falling below 4%. (Bond prices and yields move in opposite directions.) Supportive technical conditions remained in place in the municipal bond market, with reinvestments from coupon payments and bond maturities leading to strong demand for munis.

Spreads in the investment-grade corporate bond market tightened early in the week, led by more volatile issues. Total weekly issuance was near the lower end of expectations, while issues early in the week were oversubscribed. The high yield market was fairly quiet with light trading activity as investors awaited inflation data. Below investment-grade bonds then traded higher as broader risk markets and rates rallied following the soft CPI print and better-than-expected PPI figure. Investors will now turn their attention to earnings as several big banks began reporting on Friday.

In addition to the broader risk rally, a technical imbalance contributed to the positive tone in the bank loan market with limited supply outside of higher-dollar loans while buyers were mostly focused on discounted names. The secondary market was very well bid as issuance could not keep up with demand.

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