Markets Rally on Middle East Ceasefire; Bonds Rise
Good morning!
The Dow (+3.8%), NASDAQ (+4.2%), and S&P 500 (+3.5%) each rose sharply for the week. Similarly, taxable bonds gained 0.7% and tax-free municipal bonds gained 0.2%. The 10-year Treasury yield fell 0.10% to finish the week at 4.28%.
Despite there being a mixed bag of economic data last week, markets rallied due to the ceasefire in the Middle East, which also caused oil prices to drop back down from recent highs. Since the stock market bottom on April 8 following the announcement of tariffs, the markets have risen 25% and are approaching their all-time highs reached in early February. Further, the artificial intelligence (AI) related stocks that led the charge up then down, are back in the limelight again and pushing the markets upward.
In economic news, existing home sales rose over the prior month but are down from the prior year. More notably, the inventory of existing homes was up 6.2% over the prior month and 20.3% over the prior year. A lack of inventory was to blame for the rapidly rising home prices for the past couple years, and that seems to be waning. The Fed-favored inflation gauge – Personal Consumption Expenditures (PCE) - rose 2.3% over last year, in line with expectations, but core inflation moved up to 2.7%, slightly higher than the prior month. Lastly, initial jobless claims fell last week, but continuing claims rose to their highest level since November 2021, suggesting that many people that have been laid off have not been able to find a job. See the chart below.
US Continuing Jobless Claims
Source: YCharts; US Labor Department
So, what does all this mean? The Fed controls interest rates and uses them as levers to create economic growth by lowering rates, or slow economic growth by raising rates. The Fed has two mandates – control the labor market and inflation. The labor market seems to be weakening, but inflation is showing signs of rising recently, despite it falling over the past several months. This puts the Fed in a tough position for lowering interest rates, as that could cause economic growth which could subsequently cause inflationary pressure. Until the economic data shows clear direction, the Fed is holding off on making any decision. If the Fed lowers interest rates, that will likely be met with a rally in the stock and bond markets.
Have a great day, and rest of your week, and Happy Birthday, America!!
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