Bounce Back.
Robert R. Fragnito
Chief Operating Officer | Financial Advisor | Portfolio Manager at MCF Capital Management, LLC
U.S. stocks rallied on Friday as investors digested a positive inflation report following Thursday’s headline driven decline.
Stocks roared back on Friday as the S&P 500 completed one of its biggest days since the end of June. The markets began declining on Thursday afternoon after Nikkei reported that the Bank of Japan (BoJ) was considering "tweaking" monetary policy during its meeting on Friday.
The BoJ decided to make its yield curve control more flexible on Friday, but Gov. Kazuo Ueda said that the decision does not imply a shift in its easy monetary policy stance. However, analysts believe that allowing traders to bring the Japanese 10-year bond yield above the 0.5% cap suggests that the central bank is starting to pivot.
In economic news, investors cheered a drop in the Fed’s favorite inflation gauge, the PCE Deflator. The headline reading revealed that inflation fell on an annualized basis to 3% in June (+0.2% MoM) from 3.8% in May (+0.1% MoM).
When excluding volatile food and energy costs, or the core read, inflation in June fell to 4.1% annualized (+0.2% MoM) from 4.6% (+0.3% MoM) the month prior. Both readings fell mostly within expectations.
Elsewhere, the University of Michigan released its final read on consumer sentiment for July. Little was changed from the preliminary read as consumer sentiment landed at a 22-month high in July.
U.S. Treasury yields fell on Friday in reaction to this latest update on inflation. Also taking account of the PCE data, little changed in the fed funds futures market as probabilities for another Federal Reserve hike remain in the minority for the next three policy meetings.
The commodity complex finished in positive territory on Friday. Both WTI and Brent crude oil finished in at their highest levels since mid-April following the latest rate decisions from the ECB and the Fed and with the potential of Saudi Arabia cutting production. Gold futures also finished higher as the U.S. dollar retreated.
Looking Ahead
What a week! It was filled with positive corporate earnings, monetary policy decisions from three major central banks, records were achieved and missed by the Dow Jones Industrial Average, while the U.S. economy remained strong, and inflation slowed. All major indexes are set for weekly gains, with the Dow up 0.7%, the S&P 500 rising 1%, and the tech-heavy Nasdaq advancing 2%.
Monetary policy was the big take-away theme for the week. Investors now forge ahead understanding that the U.S. Federal Reserve is effectively open to possibilities on whether it will pause or hike in subsequent policy meetings. Meanwhile, Thursday’s negative reaction to the BoJ news in both equity and bond markets revealed serious vulnerabilities and doubts over monetary policy in these markets.
Today’s PCE inflation report was positive and as a result, momentum over the “Fed is Done” narrative continued. Meanwhile, details in the employment cost index report revealed moderated gains on wage growth and cooling from the previous quarter. Unfortunately, this is considered still too high for the Fed.
Investors will now have to sharpen their forecasting skills—the Fed also—in determining where inflation goes from here. By our assessment, inflation will reaccelerate or remain sticky, as inflationary pressures mount. To name a few: commodity prices are rising (oil in focus), the U.S. dollar is rising, the labor market is strong/strengthening, and the U.S. economy remains resilient.
The good news on inflation appears to be behind us and is reflected in financial markets, but what lies ahead? We are remaining strategically defensive in this environment as we agree with Fed Chair Powell, “getting inflation to 2% has a long way to go.”
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MCF Capital Management, LLC
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Today’s Market Dashboard is a collection of important data covering markets, the economy, and news items we’ve monitored throughout the trading day.
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UNIVERSITY OF MICHIGAN SURVEY (JULY - FINAL)
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MCF Capital Management, LLC is an independent, family-run, financial advisory firm that manages investment portfolios for individuals and businesses through Quantitative Market Data Analysis.
THIS ARTICLE IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT INVESTMENT ADVICE.
📚 SOURCES: MarketWatch, Investing.com, CNBC, FinancialJuice, Dow Jones NewsPlus