A flurry of U.S. employment data this week left investors puzzled about the future stance of the Federal Reserve\u2019s monetary policy, but next week\u2019s June CPI report may give the stock market more clarity on whether the Fed will still have to ratchet up its fight against inflation after pausing its aggressive series of interest-rate hikes last month.\u00a0<\/p>\n
The June consumer price index report, which is set to be released Wednesday at 8:30 a.m. ET, may either give green light to a continued stock-market rally, or kill the current baby bull market as macroeconomic headwinds are intensifying and may potentially derail the rally, said market analysts. \u00a0<\/p>\n
\n
The June CPI reading from the Bureau of Labor Statistics, which tracks changes in the prices paid by consumers for goods and services, is expected to show a 3.1% rise from a year earlier, slowing from a 4% year-over-year advance seen in the previous month, according to a survey of economists by Dow Jones. The core price measure that strips out volatile food and fuel costs, is expected to rise 5.0% from a year earlier, down from 5.3% in May. \u00a0<\/p>\n
Tony Roth, chief investment officer at Wilmington Trust, said his team expects to see disinflation continue in June, especially in the so-called super-core inflation, excluding energy, food and housing expenses, and which falls more slowly than the broader gauge.<\/p>\n
\u201cWe expect to continue to see significant weakening across the board of inflation, and that should feed into this narrative that the Fed is going to be close to being done,\u201d Roth told MarketWatch on Friday. \u201cIf it is the worst case scenario \u2013 two more hikes, that will also feed into that narrative that two more hikes should be able to accomplish their objective.\u201d<\/p>\n
However, it is hard for the stock market which is currently driven by \u201cbullish sentiment\u201d and \u201cexcessive cash balances\u201d to continue the rally because \u201chow can you get surprised on the upside when you\u2019ve already priced in lots of good news,\u201d said Irene Tunkel, chief strategist of U.S. equity strategy at BCA Research.\u00a0<\/p>\n
\u201cThe stock market is more likely to go down from here than go up because once you are not getting the same level of positive surprises [in CPI data as you priced in], it is really easy for the market to come down,\u201d Tunkel said.\u00a0<\/p>\n
Overly bullish sentiment, extended valuations for technology companies, and improving economic expectations are fertile ground for disappointment in the stock market, especially when monetary policy is restrictive, according to Tunkel. \u201cIt\u2019s just too early to celebrate victory,\u201d she said.\u00a0<\/p>\n
See: <\/strong>Here\u2019s what stock-market investors \u2014 and probably the Fed \u2014 don\u2019t like about the June jobs report<\/p>\nThe U.S. stock market has swung from \u201chard landing\u201d fears in the first half of 2023 to the \u201csoft landing\u201d hopes in the second half after the Fed decided to leave its benchmark interest rates unchanged at 5% to 5.25% in June. However, Fed Chair Jerome Powell warned that policy makers still expect more interest-rate increases this year to combat inflation, with some of them forecasting two more quarter-point hikes in the second half of 2023.\u00a0<\/p>\n
Investors had to weigh up a mixed bag of economic data this week. U.S. stocks suffered broad losses on Thursday after data showed the private sector created nearly half a million new jobs in June, sending Treasury yields
\n TMUBMUSD10Y,
\n 4.067%<\/bg-quote>
\n higher and spurring fears of further Fed interest rate hikes as the labor market still remains too tight for the central bank to relax its monetary tightening.\u00a0<\/p>\nHowever, one day later, a still-strong but weaker-than-expected June nonfarm payrolls report has taken some steam out of what had been a stunningly resilient labor market, leaving investors divided over whether the results are strong enough to force policymakers to raise rates further than expected and risk driving the economy into recession.<\/p>\n
Fed-funds futures traders priced in an over 92% probability the Fed will lift the benchmark interest rates by 25 basis points to a range of 5.25% to 5.5% later this month, according to the CME FedWatch Tool. Meanwhile, expectations for another quarter percentage point rise in either September or November faded somewhat on Friday, but remained above 25%.\u00a0<\/p>\n
David Lefkowitz, head of equities Americas at UBS Global Wealth Management, said the \u201coverall tone\u201d of the jobs data is that the U.S. economy continues to remain resilient. \u201cA big beat on the ADP and a little bit of a miss on the government job report \u2014 the larger picture here is that the U.S. economy remains more resilient than the markets had been expecting a few months ago,\u201d he told MarketWatch in a phone interview on Friday.\u00a0<\/p>\n
However, Roth of Wilmington Trust thinks Friday\u2019s report shows a \u201cmajor inflection in the labor market\u201d that there is no reason to think that the Fed still needs to keep rates at higher levels for so long, but it is \u201cvery orthogonal\u201d to the Fed\u2019s tightening path in the second half, which is more interest-rate hikes. <\/p>\n
\u201cThe way I would describe it now is that any further hikes are \u2018insurance hikes\u2019\u201d for the Fed to complete its job against inflation, said Roth.\u00a0<\/p>\n
See:<\/strong> Markets caught in \u2018self-defeating feedback loop\u2019 with Fed on inflation, hedge-fund trader says<\/p>\nLefkowitz pointed out that it\u2019s important for investors to take the interest-rate moves in context in terms of \u201cwhat else is going on\u201d in the economy. The rate moves so far in 2023 are mainly driven by a \u201cbetter economic growth outlook\u201d than inflationary pressures, he said. 2023 also provides a better environment for corporate profit growth which may significantly improve compared to the second half of 2022, with companies\u2019 forward estimates rising over the last three months, according to Lefkowitz. <\/p>\n
However, Tunkel at BCA Research said it is the \u201cconundrum\u201d between economic growth and inflation that makes the current economic picture muddled.\u00a0<\/p>\n
\u201cThe economy will have a very long runway from very strong growth, and because rates are not restrictive enough, that runway keeps getting longer,\u201d Tunkel said via phone. \u201cThat is the conundrum because if we do have strong growth, inflation is unlikely to come down because growth and inflation are attached at the hip \u2013 they move in lockstep.\u201d\u00a0<\/p>\n
U.S. stocks finished the week lower with the Dow Jones Industrial Average
\n DJIA,
\n -0.55%<\/bg-quote>
\n seeing its largest weekly decline since March. For the week, the Dow dropped nearly 2%, the S&P 500
\n SPX,
\n -0.29%<\/bg-quote>
\n fell 1.2% and the Nasdaq Composite
\n COMP,
\n -0.13%<\/bg-quote>
\n declined 0.9%, according to Dow Jones Market Data.<\/p>\n<\/p><\/div>\nRead the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"A flurry of U.S. employment data this week left investors puzzled about the future stance of the Federal Reserve\u2019s monetary policy, but next week\u2019s June CPI report may give the stock market more clarity on whether the Fed will still have to ratchet up its fight against inflation after pausing its aggressive series of interest-rate […]<\/p>\n","protected":false},"author":1,"featured_media":33346,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[241],"tags":[83],"class_list":["post-33345","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-markets","tag-featured","post_format-post-format-gallery"],"yoast_head":"\n
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