Weekly Market Update: July 10, 2023

Inflation is trending in the right direction. This was exhibited in the Labor Department’s report on May personal income and spending. Specifically, the Personal Consumption Expenditures (PCE) Price Index, the measure of inflation monitored most intently by the Federal Reserve, moderated to an increase of 3.6% over the 12-month period. This figure was down notably from the April tally of 4.3% and the lowest reading in two years. On a month-to-month basis, the PCE Price Index advanced just 0.1% (down from 0.4% in April), and when stripping out the more volatile food and energy components, the core PCE Price Index growth also moderated.

This gives Wall Street reason to believe the Federal Reserve will eventually reconsider its hawkish monetary policy stance. Federal Reserve Chairman Jerome Powell said the central bank will be “data driven” in formulating its monetary policy course. With inflation showing signs of easing, sentiment on the Street is building that the Fed will slow the pace of rate increases, after likely hiking the federal funds rate by a quarter point, to a range of 5.25% to 5.50%, at the Federal Open Market Committee meeting later this month. Still, few see reductions on the horizon until 2024.

The U.S. economy is still hanging in, despite the Fed’s most restrictive monetary actions in four decades. On point, the final estimate of first-quarter gross domestic product (GDP) growth was revised from 1.3% to 2.0%. The labor market is still strong, and there have been recent gains in durable goods orders, homebuilding activity, and consumer confidence. (Note that the June report on employment was due to be released shortly after we went to press.) The idea that the Fed can orchestrate a “soft landing” for the U.S. economy is credible.

Second-quarter earnings season is at hand. The consensus is looking for aggregate earnings for S&P 500 companies to fall nearly 7%, which would mark the third-straight quarterly decline. However, much like the first period, the possibility of better-than-feared results, given the resiliency of the U.S. consumer, may prove supportive for stocks.

Conclusion: The equity market has benefited from a “Goldilocks” scenario developing for the Federal Reserve, which is the economy expanding, but not at a pace strong enough to bring worries that inflation will reaccelerate. 

Source: ValueLine.com