Market Power | June 4, 2021 | FFS

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Markets charged back late in the week. This led to weekly gains, but does the market have staying power?

Monday

Memorial Day

Tuesday

The holiday lengthened weekend did not result in volatile markets Tuesday. The S&P 500 was virtually unchanged for the day. ISM Manufacturing improved more than expected, likely keeping markets calm as they wait for jobs data.

Wednesday

Wednesday’s market movement was muted, much like Tuesday. The S&P 500 gained 0.14% on the day. Market participants seemed as though they are waiting for the results of the monthly jobs report due out Friday.

Thursday

Markets were more active on Thursday as data began to flow. Jobless claims fell below 400K for the first time since the start of the pandemic and services data jumped dramatically. While this was good news, the S&P 500 shed 16 points on what this could mean for the jobs report.

Friday

The May jobs report dropped on Friday morning, showing unemployment has fallen to 5.8%. More importantly only 492K private nonfarm payrolls were added in May. This was a ‘bad news is good news’ situation as the S&P 500 added 36 points on the day. The softer data eases concern over potential inflation.

Conclusion

The S&P 500 is with in 3 points of its all-time high set at the start of May. With earnings season behind us and economic data for May mostly out, it may be tough for the index to set record highs in the coming weeks as headline risk will carry more weight.