Weekly Market Performance – Markets Solidly Higher Helped by Improving Inflation and Earnings
U.S. and International Equities
All major market indexes ended the trading week higher as the energy sector lagged. June’s improving inflation report along with better-than-expected earnings from Delta Airlines, PepsiCo, and today’s reports from J.P. Morgan, Wells Fargo, Citigroup, and United Healthcare helped the averages advance solidly in the green this week.
The AAII Investor Sentiment Survey noted that that the percentage of bulls declined over 5% to 41% last week, however it is the sixth consecutive week above the historical 37.5% average. Moreover, the most recent survey results represented the longest above-average streak in two years.
Fixed Income Returns Higher
The Bloomberg Aggregate Bond Index finished the week higher after the benchmark bond index had declined for three straight weeks. This week’s better-than-expected inflation report had traders believing the Federal Reserve (Fed) is near the end of its campaign of raising interest rates. Treasury yields were generally lower during the week with the 5-year and 7-year tenors down the most.
High-yield bonds ended the week higher as well as it participated in the “risk-on” sentiment following the better than expected economic data. Floating rate bank loans have been the beneficiary of a “higher for longer” rate environment, for now. The LSTA US Leverage Loan 100 Index has returned over 6% in 2023, far outpacing core bonds. However, higher interest rates, and thus higher interest expenses, could be problematic for borrowers if the Fed keeps rates elevated.
Commodities Mostly Higher
Energy prices ended mixed this week with oil higher but natural gas prices lower. The rally in oil could resume as easing inflation, plans to refill the U.S. strategic reserve, supply cuts from OPEC and production disruptions curb oil supplies. The major metals (gold, silver, and copper) finished the week higher. The U.S. dollar index reached a 15-month low this week.
Economic Weekly Roundup
June Consumer Prices
June’s Inflation report came in below economists’ consensus forecasts for both headline and core. Consumer prices rose 0.2% in June, pushing the annual rate of inflation down to 3.0%, the lowest annual rate since March 2021. More importantly, inflation, excluding food and energy rose only 0.2% in June, the smallest monthly gain since August 2021.
We expect the Fed to raise rates during this month’s Federal Open Market Committee (FOMC) meeting on July 25-26. That being said, further evidence of ebbing inflation pressure increase the chances that this month marks the last hike of this Fed rate hiking cycle.
June Producer Prices
Wholesale prices inched higher in June, but after the downward revision for May the annual rate of producer price inflation was only 0.1%. The rise in wholesale prices in June was wholly attributed to an increase in services. Prices for final demand goods were unchanged. The cost of moving freight is a leading indicator of future economic activity and in June, the prices for truck transportation fell 2.1%, pulling the index down to its lowest since October 2021.
The decline in wholesale prices, especially for transporting freight, foreshadows a slowdown in both economic activity and a further deceleration in consumer prices throughout the balance of 2023. This is another positive report for investors desperate to see inflation dissipate.
June Small Business Report
The widely followed National Federation of Independent Business (NFIB) “Optimism Index,” while still lower than its pre-COVID-19 surveys, reached its highest level for the year in the June report. Small businesses in the U.S. are responsible for approximately 63% of new jobs established and represent an important gauge on inflationary pressures and business expectations.
Overall, concern over inflation still weighs on business owners, but it has eased considerably. The percentage of owners raising prices in June dropped to the lowest level since 2021. Similarly, projections for stronger business conditions ticked slightly higher. Small business owners reported the pressure to raise wages in order to keep employees has also eased, allowing more owners to maintain prices at a steady level. Still, 31% reported they could charge their customers more over the next three months.
Weekly Employment Report
Initial claims for the latest week came in above economists’ consensus expectation and higher than the prior week. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were below both the prior week’s levels and economists’ expectation. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
Tuesday: Retail sales (Jun), capacity utilization (Jun), industrial production (Jun), manufacturing production (Jun), business inventories (May), NAHB Housing Market Index (Jul)
Wednesday: Building permits (Jun), housing starts (Jun)
Thursday: Weekly initial and continuing unemployment claims, existing home sales (Jun), Leading Indicators (Jun)
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