Weekly Commentary (7/15/24) – Markets Embrace Cooler Inflation Data

The equity markets seemed to anticipate good things after listening to Fed Chair Powell’s testimony to Congress on Tuesday and Wednesday and rose sharply on Wednesday.  On Thursday, CPI numbers came in meaningfully cooler, and both equities and bonds continued their advance – though there were signs of some rotation away the technology sector in the equity markets.  

For the week, the DJIA gained 1.61% while the S&P 500 added 0.89%.  The tech-heavy Nasdaq had a slight pull-back and fell 0.38%.  International markets had another strong week as the MSCI EAFE index finished up 2.29% and emerging market equities (MSCI EM) added 1.84%.   Small company stocks, represented by the Russell 2000, reversed course, and had a major jump higher by adding 6.01%.  Fixed income, represented by the Bloomberg Aggregate, gained 0.82% as yields continued to move lower. As a result, the 10 YR US Treasury closed at a yield of 4.18% (down ~ 10 bps from the previous week’s closing yield of ~4.28%).  Gold prices closed at $2,414/oz – up 1.07% as the U.S. dollar weakened 0.79% on the week. Oil prices fell slightly to close at $82.21 per barrel, down 1.14% on the week.    

FOMC Chair Powell’s testimony brought investors some optimism that the FOMC will make some interest rate cuts in the fall.  Like a thirsty desert traveler, the markets beamed at the thought of sipping from the pitcher of lower rates and moved both equity and bond prices higher.  When Thursday’s June CPI numbers showed a 0.1% decrease over May and the CPI YoY rate dropped to 3.0% (3.1% expected), investors flocked to small and mid-cap stocks foreseeing how those companies might perform if they could get some relief from the elevated cost of capital.  The PPI numbers on Friday were also encouraging, and the optimism lifted stocks and bonds further.  Buried in the CPI numbers is the very encouraging news that “shelter inflation”, though 0.17% higher, slowed to its lowest rate of increase since January 2021.

With labor markets only cooling slightly, and inflation seeming to resume its painstaking retreat, the probability of a “soft-landing” is rising.  While there is no formal definition of a “soft-landing”, most investors interpret it as the FOMC removing “restrictive policy” without the economy suffering a recession, or unemployment nearing 5%, or higher.  As mentioned here before, it will be interesting to see how and when the bond market will react to the reality that the FOMC is unlikely to make significant interest rate cuts under those conditions.  To do so would mean taking a major risk of reigniting inflation.  It is hard to reconcile the interest rates of longer termed bonds without very sizeable rate cuts by the Fed…

This week is light on economic news: retail sales, housing, production and capacity utilization data and US leading economic indicators are all reported, and none are particularly weighty studies for most investors.  However, Q2 earnings results are coming out and these will be bringing the markets important data about results and outlooks.  Stay diversified, stay invested and stay patient!

If you prefer heat over cold, this is your time - enjoy the summer!

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