After a strong jobs report last week raised concerns around how much further the Federal Reserve (Fed) may have to raise rates, the popular inflation gauge, the Consumer Price Index, showed year-over-year inflation declining to 3% in June from 4% a month prior. While certain components of inflation such as food and energy remained sticky, both the headline and core inflation gauges came in below expectations and moved lower on a yearly basis.
Both equity and fixed income markets responded favorably last week to this cooling inflation data that supported the disinflationary narrative, leaving some investors wondering if a soft landing is possible. The S&P 500 moved higher by 2.4% while its small cap sibling, the S&P 600, closed higher by 3% − a positive sign that the move was not driven by only the largest companies. Fixed income markets benefitted as well, seeing yields drop meaningfully across the curve.
The Fed’s next opportunity to raise rates is less than two weeks away, and with earnings underway, they will get a look into the health of consumers and corporations. Large cap earnings expectations have risen this year, yet expectations for small companies with less robust balance sheets continue to fall. Further weakness or surprising strength among smaller companies will give a better picture of the overall economic environment.
A look back
- Global equity markets rallied last week. The U.S. underperformed, though the S&P 500 was still up 2.4%. Emerging markets outperformed and were up nearly 5%.
- Yields moved broadly lower last week with the 2-year Treasury dropping 0.21% to 4.72% and the 10-year lower by 0.23% to 3.81%.
- Second quarter earnings season kicked off last week with several of the major banks beating earnings expectations and raising full-year 2023 guidance.
A look ahead
- Earnings will be at the forefront of investors’ minds this week with the main theme being financials plus several other mega cap giants.
- Treasury Secretary Yellen and finance chiefs from the Group of 20 (G20) nations will meet in India this week to assess multilateral development banks and climate change.
- Economic releases: Retail Sales, Industrial Production, Empire Manufacturing, Building Permits, Housing Starts, Existing Home Sales, and the Leading Index.
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