This morning, all eyes are on the latest Consumer Price Index (CPI) release, which was expected to provide more insight for the data-driven Federal Reserve on the state of inflation at the consumer level. At 8:30 A.M. (EDT), the Labor Department reported that the June CPI decreased 0.1%, which was below the consensus forecast of +0.1% and May’s unchanged reading. The core CPI, which excludes the more-volatile food and energy component, came in at 0.1%, which also was below the consensus estimate of 0.2%. On a 12-month basis, the CPI and the core CPI increased 3.0% and 3.3%, respectively, with both measures coming in below forecast. The CPI data indicate that the pace of price growth at the consumer level is slowing, which is a good scenario for the Fed in its battle to tame inflation. The Labor Department’s companion report on June producer (wholesale) prices will come before the commencement of trading tomorrow morning.
In a separate release, the Labor Department reported that initial jobless claims for the week ending July 6th came in at 222,000, which was down sharply from the previous week’s revised tally of 239,000 and an indication that labor market conditions are still quite solid. Treasury yields, which had eased this week following last week’s mixed labor market data, are again moving lower following the CPI report and the equity futures—modestly lower heading into the economic release—quickly reversed course and are now presaging a relatively flat start to the trading day stateside.
Heading into today’s inflation data, the major equity averages took another step higher this week, with the broader S&P 500 Index passing the 5,600 mark for the first time and the technology-heavy NASDAQ Composite setting a few more record highs. Stocks got a boost from last week’s “Goldilocks” report on the labor market. That release indicated some weakness in job market conditions and also a drop in inflation in the labor market. However, with an estimated 206,000 nonfarm payrolls created last month, it was not enough of a drop-off to suggest that the case for a “soft landing” is not in play anymore. This also brought hopes on Wall Street for a quarter-point interest-rate cut by the Federal Reserve, perhaps as early as the September Federal Open Market Committee (FOMC) meeting.
The more-dovish monetary policy sentiment from Wall Street gained even more steam on Fed Chairman Jerome Powell’s two-day testimony before Congress, in which he said the case could be made for beginning to reduce the federal funds rate in the months ahead. Treasury market yields fell on this commentary and equities took off yesterday afternoon. The Dow Jones Industrial Average, which had been in negative territory earlier in the session, rallied and finished 429 points (+1.1%) to the upside, while the small-cap Russell 2000 also joined the party with a gain of more than 1% on the day.
Meanwhile, tomorrow will mark the unofficial start of second-quarter earnings season with the release of quarterly data from a number of the nation’s big-bank money centers, including JPMorgan Chase (JPM). This morning, airline company Delta Air Lines (DAL) reported record revenue last quarter, but the total fell short of Wall Street’s expectations. The company also issued full-year earnings-per-share prognostications that were weaker than the Street’s forecast heading into the quarterly release, and the stock is trading lower in pre-market action.
The bank results and accompanying commentary from banking leaders will be closely watched for clues about the state of the domestic economy and the health of the U.S. banking system. Last week, we learned from the Federal Reserve that the nation’s 31 largest banks passed the annual stress tests, meaning that they would have enough capital in reserve to withstand the impact of a severe recession. Following those results, a number of the prominent banks announced increases to their dividend payouts and their stocks moved higher in response.
In general, with stock market valuations looking quite frothy these days, we continue to recommend that investors look at the stocks of those companies that have demonstrated a history of producing steady earnings and cash flow growth. Those entities are less likely to disappoint Wall Street with their latest quarterly results. Much like was the case during the first-quarter earnings season, the stocks of companies with extended price-to-earnings multiples may be more likely to feel the wrath of Wall Street if they report disappointing financials or outlooks. That said, those investors who are more risk-tolerant may want to take a closer look at the stocks of the small-cap companies. The small-cap sector has not played a big role in the stock market’s year-to-date notable advance, so it could be a place, especially if the Fed eventually pivots on the monetary policy front and begins to loosen the monetary reins, where investors look in the second half of this year. It’s also worth noting that a report released on Tuesday showed that confidence among small business leaders is at a six-month high. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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