The most important event for U.S. markets this week is likely to be Thursday’s inflation report. This is because it’s the start of the second quarter earnings reporting season for companies, there are a number of Treasury debt auctions, and there may be changes in the presidential race.
The June consumer price index numbers could have big effects on the markets, just like any other big economic report. But investors will be paying extra close attention this month because the Federal Reserve’s first interest rate cut could depend on them.
A rise in inflation that is smaller than expected could at least push Fed Chair Jerome Powell to more strongly prepare the market for a rate cut at the Fed’s September meeting. However, some people think that a number that is weak enough could even allow a rate cut in a few weeks, which CME Group data shows futures traders have ruled out as very unlikely.
A reading that is hotter than expected, which most economists don’t think will happen, could stop the stock market rally in its tracks.
Both Tom Lee of Fundstrat and Neil Dutta of Renaissance Macro warned that Wall Street might be underestimating the chance of a rate cut at the July meeting of the Federal Reserve. They told MarketWatch about this on Friday. Their recent out-of-the-box calls on the economy and the markets have been right, so investors should pay attention to what they have to say.
Lee wrote in a commentary, “If this is another soft reading, there is a chance of a Fed cut at the July [Federal Open Market Committee] meeting.”
The most important event for U.S. markets this week is likely to be Thursday’s inflation report. This is because it’s the start of the second quarter earnings reporting season for companies, there are a number of Treasury debt auctions, and there may be changes in the presidential race.
The June consumer price index numbers could have big effects on the markets, just like any other big economic report. But investors will be paying extra close attention this month because the Federal Reserve’s first interest rate cut could depend on them.
A rise in inflation that is smaller than expected could at least push Fed Chair Jerome Powell to more strongly prepare the market for a rate cut at the Fed’s September meeting. However, some people think that a number that is weak enough could even allow a rate cut in a few weeks, which CME Group data shows futures traders have ruled out as very unlikely.
A reading that is hotter than expected, which most economists don’t think will happen, could stop the stock market rally in its tracks.
Both Tom Lee of Fundstrat and Neil Dutta of Renaissance Macro warned that Wall Street might be underestimating the chance of a rate cut at the July meeting of the Federal Reserve. They told MarketWatch about this on Friday. Their recent out-of-the-box calls on the economy and the markets have been right, so investors should pay attention to what they have to say.
Lee wrote in a commentary, “If this is another soft reading, there is a chance of a Fed cut at the July [Federal Open Market Committee] meeting.”
Still, since the start of the year, stocks have moved an average of 0.9% on days when CPI is released. This is almost twice as much as the S&P 500’s daily average move of 0.5% through Friday.
Even more importantly, any sign that the Federal Reserve might be about to lower interest rates could help parts of the market that have been underperforming the S&P 500. Wall Street experts say that small caps and stocks that are more sensitive to interest rates and business cycles, like real estate stocks, could go through the roof.
According to FactSet data, real estate has been the worst-performing of the S&P 500’s 11 sectors over the past year. Since the beginning of 2024, the small-cap Russell 2000 index RUT has also gone down slightly.
MarketWatch talked to Joseph Gaffoglio, president of Mutual of America Capital Management. “When the Fed does cut rates, that could be the spark for the market to broaden out,” he said.
Before he said this, Gaffoglio said that he doesn’t think the Fed will lower interest rates on loans any time soon. He thinks that there will be no more than one cut this year, most likely in November or December.
Based on polls of economists by The Wall Street Journal, headline inflation was expected to drop from 3.3% year-over-year in May to 3.1% in June. Core inflation, which takes volatile costs like food and energy out, is expected to stay the same at 3.4%.
If anything, the monthly jobs report from the Labour Department that came out on Friday made Dutta’s case that the Fed should act quickly stronger. The report showed even more proof that the job market has begun to slow down.
In June, the unemployment rate rose to its highest level since late 2021. At the same time, wage growth slowed, which is usually a sign of inflation.
Even though more than 200,000 new jobs were created, the average for the last three months was lowered by 111,000 jobs over the previous two months.
There was more data that showed the same thing. These new numbers show that the economy is starting to weaken because of the highest interest rates in more than 20 years.
The official GDP growth rate for the first quarter was 1.4%, and a real-time indicator from the Atlanta Fed predicts a 1.5% rate for the second quarter. In contrast, real GDP grew at a rate of 3.4% in the fourth quarter.
“It is clear that GDP growth is slowing down,” Dutta said. The risk now is that the Fed has stayed too long with rates that are higher for longer.
Others had a different take on the most recent report on the job market. Some people pointed out that the rise in the unemployment rate wasn’t because a lot of people lost their jobs, but because more people started looking for work.
Powell said at a recent conference of central banks in Sintra, Portugal, that the inflation scare from earlier this year was over and that the U.S. economy seemed to be back on track to deflation.
The Fed chair did say, though, that inflation probably wouldn’t return to the 2% target until late 2025 or early 2026. He also said that the risks related to both consumer prices and the job market had become equal, which means that the Fed must take both into account equally.
The minutes from the Fed’s most recent meeting in May showed that officials are still not sure how much more proof of falling prices is needed. However, some officials did say that they were looking for signs that the economic slowdown could get worse. It’s still too early to tell if a soft report in June will help.
As the market closed on Friday, stocks went up because traders in futures bet that new data would make it more likely that the Fed will cut rates in September. The S&P 500 SPX rose 30.17 points, or 0.5%, to end the day at 5,567.19. This was the 34th record closing high for the index in 2024. The Nasdaq Composite COMP went up 164.46 points, or 0.9%, to 18,352.76, which is the 24th record of 2024.
On the other hand, the Dow Jones Industrial Average DJIA went up 67.87 points, or 0.2%, to 39,375.87.
