Cracking Markets? | May 27, 2022 | 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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Is inflation showing signs of cracking? If so, what could it mean for market directions from here?

Monday S&P 500 1.86% | NASDAQ 1.59%

Equities rallied on a weaker dollar, making markets more attractive to international investors. Tariff relief was mentioned by the president to help inflation. The rise on Monday was the first in several weeks as the S&P 500 is riding a seven-week losing streak.

Tuesday S&P 500 0.81% | NASDAQ 2.35%

A retreat was in order on Tuesday as a negative earnings forecast from Snap sent markets lower. Interestingly, the low was not an entire erasing of yesterday’s gains. This is the first time in a while this has occurred. It may be a signal that we have seen the bottom… Just maybe…

Wednesday S&P 500 0.95% | NASDAQ 1.51%

Markets gained on Wednesday, marking the second day this week. Something that has also not happened in a while. The rise was partly attributable to the Federal Reserve Board (FRB) minutes. They indicated that the FRB expects to be flexible with their path given economic conditions. This opens the door to a more dovish FRB.

Thursday S&P 500 1.99% | NASDAQ 2.68%

The markets opened sharply higher and stayed there throughout the day. The catalyst was retail earnings data that impressed from Macy’s and Dollar General. Interestingly, strong earnings for Dollar General is more of an indication of the strong impact inflation is having on the consumer.

Friday S&P 500 2.49% | NASDAQ 3.35%

Markets surged into the end to the week. The gains amounted to a 6% week over week rise for the S&P 500. This jump could help the month of May end in the green (ever so slightly). A key piece of data released Friday morning was PCE data (inflation). It showed signs of a weakening, moving from 6.6% down to 6.3%. It may seem nominal, but year over year inflation does not move by big numbers.

Conclusion S&P 500 6.58% | NASDAQ 6.84%

The softening inflation data out on Friday was some of the most meaningful data from the week. Weaker inflation signaled that the more dovish FRB referenced on Wednesday may be a reality for markets. If that comes through, it could be fuel enough to cause a bit of a rally from this point.