Market Commentaries

  • Last Week’s Market in Review: Will Better Than Expected Inflation Data Influence the Fed?

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    Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,505, representing an increase of 2.44%, while the Russell Midcap Index moved 2.90% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 3.58% over the week. As developed international equity performance and emerging markets were higher, returning 4.87% and 4.96%, respectively. Finally, the 10-year U.S. Treasury yield moved lower, closing the week at 3.83%.

    During the past week, market participants were almost entirely focused on the recently released inflation data. Reports on the Consumer Price Index and the Producer Price Index for June were released last week. As the Federal Reserve has maintained that future Monetary Policy will be data-dependent, important data such as CPI and PPI must be analyzed carefully, which we will do in this update.

    Corporations also began to issue earnings reports for the second quarter last week. The very early results have been better than expected. In data compiled by FactSet, with just 6% of S&P 500 companies having reported 2nd quarter earnings results thus far, 80% have reported earnings per share above estimates. This upcoming week is critical as roughly 11% of the companies in the S&P 500 are scheduled to report earnings. Overall, as it stands now, according again to FactSet, the blended earnings decline for the S&P 500 in Q2 is -7.1%. If -7.1% is the actual decline for the quarter, it will mark the largest earnings decline reported by the index since the second quarter of 2020 – which was the start of the COVID-19 Pandemic.

    Last Wednesday, the Bureau of Labor Statistics (BLS) released June’s Consumer Price Index (CPI). Headline CPI and core CPI showed lower inflation. On a monthly basis, the index rose 0.2%. The consensus estimate for June was 0.3%. On an annual basis, CPI increased 3.0%, representing the lowest level since March 2021. The 3.0% rise was lower than the prior month’s result (4.0%) and the consensus estimate (3.1%). Core CPI, which strips out volatile food and energy prices, was also lower than expected. Core CPI rose 4.8% from a year ago and 0.2% monthly. Consensus estimates were 5.0% annually and 0.3% monthly. Fed officials expect the inflation rate to continue falling, particularly as the cost of shelter eases, considering that shelter accounts for approximately one-third of the weighting of the CPI.

    The Producer Price Index (PPI) for June was released by the Bureau of Labor Statistics last Thursday and showed similar results as CPI. PPI rose 0.1% in June vs. the consensus estimate of 0.2%. Annually, the PPI gained 0.1%, the smallest annual increase since August 2020.

    Equity markets moved higher on both inflation reports as market participants began to doubt Federal Reserve Chairman Powell’s indication that there may be two more rate hikes of 25 Bp (0.25%) each in 2023. Utilizing CME Group’s “Fed Watch Tool,” the probability of a 25 Bps hike at the July meeting is still over 95% moving the target rate range to 5.25% – 5.50%. However, for the remaining three Federal Open Market Committee (FOMC) meetings of 2023 (remembering that the FOMC does not meet in August), the probability that the target rate remains at 5.25% – 5.50% is greater than 55% for each meeting.

    We hope that everyone has a productive week ahead!

    CPI and PPI data are sourced from the Bureau of Labor Statistics. Corporate earnings data is sourced from FactSet. Equity Market, Fixed Income returns and rates are from Bloomberg as of 7/14/23. Economic Calendar Data from Econoday as of 7/14/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

    Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.

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