Stocks and Bonds Rally With Tame Inflation Data
Good morning,
The Dow (+1.6%), NASDAQ (+0.2%), and S&P 500 (+0.9%) all exhibited modest gains for the week. Similarly, taxable bonds gained 0.8% and tax-free municipal bonds gained 0.5%. In short, everything was up last week, and small cap stocks benefited the most, gaining about 5% for the week. The 10-year Treasury yield fell 0.10% to finish the week at 4.28%.
Last week’s gains were driven almost entirely by the tame inflation report. The Consumer Price Index (CPI) fell 0.1% compared to the prior month, and is up “only” 3.0% over last year, representing the lowest inflation rate in three years. That caused both stocks and bonds to rally, because it showed signs that the Fed may begin to cut interest rates. In fact, the bond market is now pricing in an 80% chance of a rate cut in September, and up to two more cuts before the end of the year. Also, unemployment claims were down, so if the job market remains strong and inflation eases to normal level, then the Fed has effectively done its job with its aggressive interest rate hiking campaign to combat inflation without damaging the labor market.
While this data was quite favorable, we believe it may still be too early to start running our victory lap. The Producer Price Index (PPI) has been trending upward, suggesting that the cost of wholesale goods continue to rise to the manufacturers. Thus, if those increasing costs aren’t passed on to the consumers, then the businesses will see a decrease in their profits. Further, there are other signs of the economy weakening, so we just need to remain hopeful that those trends don’t gain too much traction. Otherwise, this is very good news, so let’s look for more data to support it.
Have a great day and terrific week!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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.
