Stocks Record Highs Amid Optimism for Rate Cuts

On a strong note, stocks ended the previous week recording highs, buoyed by lower-than-expected inflation data, sparking investor optimism about potential interest rate cuts. The Nasdaq Composite rose over 3%, while the S&P 500 increased nearly 1.5%, finishing above 5,400 for the first time. Both indexes closed at record highs for four consecutive days. However, the Dow Jones Industrial Average slid by more than 0.7%.

As we move into a shortened trading week due to the Juneteenth holiday, investors can anticipate a quieter period with no major corporate news expected. The May retail sales report highlights the economic calendar, updates on manufacturing and services activity, and weekly jobless claims.

The recent Consumer Price Index (CPI) report for May showed a 0.2% month-over-month increase in the “core” CPI, excluding volatile food and energy categories. This is the lowest reading since June 2023. Similarly, the “core” Producer Price Index (PPI) remained unchanged from the previous month, contrary to economists’ expectations of a 0.3% rise.

These inflation figures have led to positive expectations for the Federal Reserve’s preferred inflation gauge within the Personal Consumption Expenditures (PCE) index later this month. Bank of America US economist Stephen Juneau noted that the PPI data supports the view that disinflation is the most likely path forward and predicted an “A+ report” for the May core PCE. Bank of America estimates a 0.16% month-over-month increase for core PCE in May.

While inflation is declining and economic growth is slowing, the Federal Reserve currently projects just one interest rate cut this year. A growing number of Wall Street economists express concern that the central bank may be navigating too fine a line with its most restrictive interest rate policy in over two decades.

The fear is that signs of economic softening, such as a rise in the unemployment rate, could worsen if the Fed maintains high rates for too long. Therefore, investors will closely watch the initial weekly jobless claims report on Thursday. The most recent release showed unexpected weekly jobless claims reaching 242,000, a 10-month high.

Neil Dutta, head of economics at Renaissance Macro, indicated in a client note that further disinflation is likely and may necessitate a shift in the Fed’s rhetoric. Dutta warned that if the Fed does not adjust its current stance, there could be significant risks.

On Tuesday, the May retail sales report will provide insight into how consumers are coping with higher interest rates. Economists anticipate a 0.3% increase in retail sales from the previous month, marking a rebound from April’s unexpected flat performance.

The recent inflation data has fueled optimism in the stock market, possibly adding momentum to the current rally. Both the S&P 500 and Nasdaq hit four consecutive record closes last week, driven by softer-than-expected inflation readings for both consumer and wholesale prices. This has maintained market optimism about two interest rate cuts this year despite the Federal Reserve’s median forecast favoring just one cut in its Summary of Economic Projections (SEP) on June 12.

Jonathan Golub, UBS Investment Bank‘s chief US equity strategist, who has one of the highest S&P 500 year-end targets on Wall Street at 5,600, believes the recent inflation data and its implications for future rate cuts “provide the potential for even greater upside” to his year-end outlook.

Weekly Economic Calendar

Monday:

– Economic Data: Empire manufacturing, June (-13 expected, -15.6 prior)

– Earnings: Lennar (LEN)

Tuesday:

– Economic Data: 

  – Retail sales, month-over-month, May (+0.3% expected, 0% previously)

  – Retail sales excluding auto and gas, May (+0.3% expected, -0.1% previously)

  – Industrial production month-over-month, May (+0.4% expected, 0% prior)

– Earnings: KB Home (KBH)

Wednesday:

– Economic Data: 

  – NAHB housing market index, June (45 expected, 45 previously)

  – MBA Mortgage Applications, week ending June 14 (+15.6%)

– Earnings: Markets are closed for the Juneteenth holiday.

Thursday:

– Economic Data: 

  – Initial jobless claims, week ending June 15 (242,000 previously)

  – Housing starts month-over-month, May (+1.1% expected, +5.7% prior)

  – Building permits month-over-month, May (+1.4% expected, -3% prior)

  – Philadelphia Business Outlook, June (4.5 expected, 4.5 prior)

  – Import prices, month-over-month, April (+0.2% expected, +0.4% previously)

– Earnings: Accenture (ACN), Kroger (KR)

Friday:

– Economic Data:

  – Leading index, May (-0.3% expected, -0.6% previously)

  – S&P Global US manufacturing PMI, June preliminary (51 expected, 51.3 prior)

  – S&P Global US services PMI, June preliminary (53.4 expected, 54.8 prior)

  – S&P Global US composite PMI, June preliminary (54.5 prior)

– Earnings: CarMax (KMX), FactSet (FDS)

As investors navigate this shortened trading week, the focus will remain on how inflation trends influence Federal Reserve policy decisions and the potential impacts on economic growth and market performance.