The futures market is indicating a slightly positive open to today’s trading. This morning, the U.S. Bureau of Labor Statistics revealed new information on inflation. For the month of June, the producer price index (PPI) advanced 0.2%, double economists’ consensus for a 0.1% expansion and the revised flat showing for May. On a year-to-year basis, the index was up 2.6%. The experts anticipated an increase of 2.3%. In the prior month, the yearly measure was up 2.4% (revised higher).
Core PPI data, stripping out volatile food and energy prices, showed a 0.4% monthly increase, also double the estimates and ahead of the recalculated 0.3% advance in May. On a yearly basis, core PPI jumped 3.0%, one-half point above what was expected. Previously, it rose 2.6% (adjusted up by three-tenths of a percent). We note, though, that excluding food, energy, and trade, yearly PPI growth fell to 3.1% from 3.3% earlier. Despite the strong PPI numbers, general inflation still appears headed in the right direction. Earlier this week, the consumer price index notably trended more modest.
On Wednesday, Federal Reserve Chairman Jerome Powell concluded two days of congressional testimony on the economy and central bank interest-rate policy. Mr. Powell said inflation is making progress in moving down to the Fed’s preferred annual rate of about 2%. Importantly, he is concerned about the health of the jobs market, seeing significant signs of slowing. Following this testimony, Wall Street has become more confident in its prediction that the central bank will cut the federal funds rate, now 5.25%-5.50%, by 25 basis points at its upcoming September meeting. The Street is hopeful that the Federal Open Market Committee will see it fit to implement another reduction of similar magnitude before yearend. Such a scenario likely would be supportive of share prices.
This week, the major domestic stock market indexes appear poised for a flat-to-up performance. At Wednesday’s close, both the broad Standard & Poor’s 500 index and the tech-heavy NASDAQ composite had, yet again, scored new records. The blue-chip Dow Jones Industrial Average improved after a couple of days of weakness. Stocks largely pulled back on Thursday, however, as the leading technology issues, most visibly Tesla (TSLA) and NVIDIA (NVDA), endured some selling pressure. Alphabet (GOOG), Amazon.com (AMZN), and Meta Platforms (META) followed suit.
It seems that, given the prospect of falling short-term interest rates, investors are inclined to take profits on the high fliers and place some cash with rate sensitive equities, more specifically, real estate companies, industrials, and utilities. In the wake of today’s PPI report, investors will get a chance to parse the preliminary number on July consumer sentiment, which is expected to show a modest improvement. In today’s trading, the market could have more of a reaction to the June-quarter earnings reports of JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). The top banks are good indicators of the health of the economy.
Next week, data will roll in on manufacturing in the New York and Philadelphia metro areas, U.S. retail sales, import prices, the domestic housing market, industrial production, capacity utilization, leading economic indicators, and initial jobless claims. Mr. Powell and other Fed officials are scheduled to speak, as well. We expect further evidence of a resilient economy, with weaker momentum in consumer spending and inflation and a softening of the employment sector. If this holds true, it would be in keeping with the Fed’s desire to execute a soft landing for the economy, without a recession.
Analysts are optimistic about second-quarter corporate earnings reports. We note that companies stand a chance of suffering greater share-price declines, if they miss expectations, than possible gains, should their results top outlooks. To yearend, equities seem likely to rise incrementally. Industry leaders offer the best defined positive potential returns. – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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