Weekly Market Vibes

June 18, 2023

Market Recap


Rally continues on calming inflation fears

Favorable inflation and growth signals appeared to help stocks continue a rally that began with only a few interruptions in late May. The S&P 500 Index notched its longest stretch of daily gains since November 2021 and its best weekly performance since the end of March. The market’s advanced narrowed a bit, however, as reflected in the renewed outperformance of growth stocks and large-caps. Markets were scheduled to be closed the following Monday in observance of the Juneteenth holiday.

Consumer inflation measure at lowest level since late 2021

Several signs emerged that the economy was arguably enjoying a “Goldilocks” expansion of continued growth alongside falling inflation. On Tuesday, the Labor Department announced that the consumer price index had increased at a year-over-year pace of 4.0%—still double the Federal Reserve’s target, but down from the prior month’s 4.9% and the slowest pace since March 2021. On Thursday, the Labor Department revealed that producer prices had declined 0.3% in May, marking four declines over the past six months.

While falling producer prices partly reflected an ongoing contraction in the manufacturing sector (as well as a substantial drop in food and gasoline prices), investors received some good news on the consumer side of the economy. On an overall basis, retail sales rose 0.3% for the month and 1.6% over the past 12 months, marking the first year-over-year increase since January. Excluding the volatile auto and gasoline segments, sales rose 0.4% in May. Meanwhile, the University of Michigan’s gauge of consumer sentiment rose more than expected and hit its highest level in four months. Weekly jobless claims were unchanged, however, defying consensus expectations for a decline from the previous week’s 20-month high.

More of a skip than a pause?

The hopeful inflation data may have helped investors absorb a somewhat hawkish outlook from Fed policymakers. On Wednesday, officials announced that they were holding the official federal funds target rate steady in the 5.00% to 5.25% range. However, the “dot plot” summarizing each policymaker’s rate expectations suggested that this was more of a “skip” than a durable “pause” in their rate-hiking schedule, as the median rate projection suggested two more quarter-point hikes by the end of the year.

The major benchmarks pulled back on the release of the data, but the hawkish dot plot seemed to be offset by Chair Jerome Powell’s following press conference, which was interpreted as a bit more dovish. Powell stressed repeatedly that the policy committee had not made any decision about raising rates and that any further moves would depend on incoming growth and inflation data. “We've moved much closer to our destination,” Powell also allowed, “which is that sufficiently restrictive rate, and I think that means by almost by definition that the risks of sort of overdoing it and…under doing it are getting closer to being in balance.”

Bond markets take Fed decision in stride

Despite the Fed’s policy announcement, fixed income markets were calm overall, with limited issuance and credit spread movements in most sectors, which may have reflected light activity in advance of the upcoming holiday weekend. Our traders noted an active secondary market in bank loans, however, amid steady demand for discounted loans and as some investors sought to take profits following recent strong performance.

Next week's Economic Calendar:

Monday - Chicago Fed National Activity Index and Dallas Fed Manufacturing Survey

Tuesday - Case-Schiller Home Price Index, Consumer Confidence, New Home Sales and Richmond Fed Manufacturing Index

Wednesday -Mortgage Apps, Durable Goods Orders and EIA Petroleum Status Report

Thursday - Jobless Claims, GDP and Pending Home Sales Index

Friday - Personal Income and Outlays, Employment Cost Index, Chicago PMI and Consumer Sentiment

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