Run Total | July 9, 2021 | FFS | Monument, CO

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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There was a little run up on markets from a point total standpoint, but volatility was way up. What does it mean?

Monday

Happy 4^th of July!

Tuesday

Markets dove on Tuesday to open the week. The S&P was down nearly 1% by mid-day but came back to end the day down 0.2%. The Delta variant took center stage as concerns are mounting that it could derail the re-opening trade currently in place.

Wednesday

The S&P 500 reached fresh all-time highs. The improved investor sentiment was on the release of Federal Reserve Board (FRB) minutes. They reflected a dovish FRB heading into the second half of 2021. The interesting thing was that interest rates in the treasury market were down. So, while there was a bid in the equity markets, there was not a sell off in bonds. This makes the rally more conservative.

Thursday

Broadly all major indices were down on Thursday. This came as the Delta variant surpassed the Alpha variant as the dominant COVID strain in the US. Continued stress over the variants will likely keep markets from climbing unfettered.

Friday

Markets surged back on Friday and ended in the green for the day (and the week). Yields increased mildly as gold and oil both surged, which are both bullish and bearish at the same time. The increase on a Friday again is a good sign that little negativity is expected across the weekend news cycle.

Conclusion

The S&P 500 rose a meager 17 points for the week. The point line, however, is deceptive as it was a volatile week. The CBOE VIX (Volatility measure) increased from 14.5 to 17.5 as the daily swings were in excess of those in the prior week. The coming week will have economic data in the form of retail sales and industrial production. The variant progress will continue to be watched as well. Additionally, GDP for China will be reported giving further indication to US consumption via Chinese exports. Increased volatility is not surprising as we move into summer months. The reduced volume is the result of summer vacations. With lower volume comes increased volatility. Increased volatility does not necessarily come with losses, it just means the swings are more violent.