July 15, 2023 Market Update

The Nasdaq and S&P 500 indexes on Thursday traded at the highest levels since April 2022 before pulling back slightly at Friday’s close.  A key catalyst driving stock prices higher for the week: news that inflation rose by a lesser degree in June than Mr. Market expected (discussed below).  

Better-than-expected inflation news also put bonds in a more attractive light as investors bid up prices of U.S. Treasuries, which pushed yields lower.  The benchmark 10-year yield, for instance, fell sharply, ending the week at 3.83% -- well below the 4.06% market for the previous week’s close.   

Friday also marked the unofficial start for the release of second-quarter earnings reports from publicly-traded companies.  Whether corporations’ profits will be able to meet market expectations will have a major impact on how the stock market performs in the weeks and months ahead.  The earnings season started with a bullish bang as several big banks reported sharply higher profits in Q2.  “The U.S. economy continues to be resilient,” said JPMorgan Chase CEO Jamie Dimon.  “Consumer balance sheets remain healthy, and consumers are spending, albeit a little more slowly.”

The Labor Department announced this past Wednesday that the U.S. consumer price index climbed 3.0% in June from the year-ago level.  The increase is sharply below the recent peak of 9.1% in June 2022, and down a full percentage point from 4% this past May. 

Core consumer prices, which exclude volatile food and energy categories and is the Fed’s preferred inflation measurement, rose 4.8% in June from a year earlier.  That’s the smallest increase since October 2021, and considerably lower than the 5.3% increase reported for May.

Good news, but with inflation still above the Federal Reserve’s 2% target the odds strongly favor another one-quarter percentage-point bump in the central bank’s primary policy rate for its next policy announcement on July 26th.  That said, last week’s inflation report has convinced some market observers that July’s expected hike will be the last for this cycle, notwithstanding recent comments from the Federal Reserve suggesting that two more rate hikes are still under consideration.

But if the one-and-done scenario proves to be the case, the odds will improve for a so-called soft landing for the economy -- inflation is tamed without triggering a recession.  That would be an impressive achievement for the Fed, and one that would surprise more than a few market pundits who were saying just a few months ago that a recession was unavoidable.