Stocks and Bonds Rally on Tame Inflation Data

The Dow (+2.3%), NASDAQ (+3.3%), and S&P 500 (+2.4%) each mounted strong gains for the week.  Meanwhile, taxable and tax-free municipal bonds also had a strong week, gaining 1.5% and 0.5%, respectively.  The 10-year Treasury yield dropped sharply (down 0.23%) to finish the week at 3.82%, and below the 4% milestone it briefly eclipsed the prior week.  Note that when Treasury bond yields go down, bond prices typically go up, as they exhibit an inverse relationship.

Last week was a fresh reminder that it’s all about investors’ predictions of what the Fed will do with regard to raising interest rates.  Two key measures of inflation were reported last week, and were considered to be tame, resulting in investors’ belief that the Fed may not be as aggressive in its interest rate hiking campaign.  Heading into these key reports, there was a 95% confidence that the Fed would raise rates at the end of July, and again at its following meeting in September.  However, with the Consumer Price Index (CPI) being reported at 3.0% (less than the 3.1% expected) and the core Producer Price Index (PPI) rising 2.4% compared to 2.6% in May, speculation is mounting that the Fed may pause again after the July 26 meeting.

Last week also started the quarterly corporate earnings season with big banks reporting last Friday.  Two of the country’s largest banks reported strong earnings for the quarter, but also a sharp drop in investment banking revenue compared to the same quarter last year.  Additionally, it is widely expected that we are amid an earnings recession, as corporate earnings are expected to decrease for the 3rd consecutive quarter.  That said, consumer spending and the labor markets have continued to remain strong, which have bolstered the economy and stock market.  However, there is concern that the consumer will soon be out of excess cash accumulated during COVID, and that could create some headwinds for the US economy, but that may not occur until several months from now.  Time will tell.

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^{The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.}