The futures market is leaning toward a negative open to today’s trading. Stocks seem set to take a bit of a breather after rallying in recent days. Early this morning, the Bureau of Labor Statistics released May data on import and export prices. Import prices slipped 0.4%, versus the prior-month advance of 0.9%. Import prices, excluding the impact of volatile fuel costs, fell 0.3%, compared to a 0.6% gain in April. Monthly export prices dropped 0.6%, but rose 0.6% year over year. Annual import and export price growth rates have essentially been trending in line with general inflation.
Shortly, the University of Michigan will present its preliminary read on consumer sentiment for the current month. Expectations are for an increase to 71.5 from 69.1 in May. Though unemployment is low and wages have improved, inflation has kept a good many consumers in a sour mood, constraining any headway in the index. Prior to the coronavirus pandemic, the index was hovering near the strong 100 mark.
Over the course of today, in the wake of the Federal Reserve’s June meeting, several central bank officials, Loretta Mester, Austan Goolsbee, and Lisa Cook, will publicly discuss short-term interest rate policy and the domestic economy. In its meeting held this week, the Fed decided to keep the federal funds rate at 5.25%-5.50%, for now. Given recent favorable inflation data, Fed Chair Jerome Powell has indicated that officials are open to one 25-basis-point cut in interest rates later this year. Many on Wall Street are hoping that inflation will move decisively lower in the months ahead, possibly backing the assumption of two cuts of the same magnitude.
With only one set of inflation numbers coming in before the Fed’s July meeting, a summer rate change seems unlikely. By the September get-together, officials will have three price data sets to weigh in their decision. In light of the upcoming Presidential election, however, we would not be surprised to see the Fed hold off on any rate cuts until November and/or December to avoid any accusations of political bias.
Share prices have improved thus far this week, thanks to the clearer prospect of a Fed rate cut and an easing in inflation. Last month, both the consumer price index and producer price indexes were tamer on a month-to-month and annual basis. We also point out that higher initial jobless claims, measured for the week ended June 8th, were supportive of stocks. The Fed is watching the job market closely, and wants to act quickly on interest rates if this key economic indicator shows significant signs of weakness. As well, investors should consider that share-price growth is being underpinned by decent prospects for corporate earnings over the next few quarters.
Through Thursday’s close, the tech-heavy NASDAQ composite was up 3.1% and the broader Standard & Poor’s 500 (S&P 500) Index had improved 1.6%. The blue-chip Dow Jones Industrial Average was down 0.4%, with Dow futures in the red this morning. Year to date, the NASDAQ, S&P 500, and the Dow have advanced 17.7%, 13.9%, and 2.5%, respectively. We believe the indexes can sustain positive momentum to yearend, barring any unexpected serious negative political or macroeconomic events. We suggest maintaining ample stock portfolio diversification, with a healthy balance of sector leaders. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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