Bulls awakened

Stocks rallied on Friday to bring home the first weekly gain after 7 painful weeks of losses. Friday’s cooling inflation number awoke some bulls following the milder than expected FOMC meeting minutes from earlier in the week.

Stay frosty. I know that it is technically a day late, but, Happy Memorial Day, if you live in the US. Aside from its paramount importance of mourning those military members who have fallen serving the country, it also marks the unofficial beginning of summer, although in the Northern Hemisphere, it officially begins June 21^st at the Summer Solstice, the longest day of the year. Tomorrow, June 1^st, marks the beginning of meteorological summer, so let’s just say, for argument’s sake, that summer has begun. I mean, it is going to be somewhere around 94º Fahrenheit (that is 34º Celsius for my non-US readers) on Wall Street today. Last week, the markets seemed prepared to ring in the season with a hot rally, after a long, cool losing streak which lasted some 7 weeks. Last week, the S&P500 gained +6.58%, the biggest weekly gain since November of 2020…it’s been that long. Last week’s upswing began on Wednesday with the FOMC minutes release. Those minutes implied that the Fed was going to stick to the plan that the markets had hoped for, which included a pair of +50 basis point rate hikes followed by a possible moderation, or a wait and see period. Absent was any mention of +75 basis point hikes or any new hawk talk. Market sentiment was so chilly recently that news of a thoughtful Fed spread warmth through the markets. The real takeaway from the minutes was that the Fed is going to be mindful of the potential for a slowing economy. With that in mind Thursday’s weaker-than-expected Pending Home Sales number and a slight downward revision of Q1 GDP got traders starting to believe that, perhaps, the Fed would not be able to hike as aggressively as it may want to. On Friday, the Core PCE Deflator, which is the Fed’s preferred metric for inflation, came in as expected at +4.9%, but lower than the prior month’s +5.2%. With 2 monthly declines in a row, there are signs that inflation may be moderating, albeit slowly. If the trend continues, the Fed may have less of an incentive to hike rates so aggressively, and it is that potential which drove stocks higher on Friday.

For many bullish traders waiting on the sidelines, Friday’s inflation number was a signal to get back in, but will those signals be enough for the rally to continue? Let’s broaden our view for the moment and look at what is coming down the pike in the months ahead. Starting with the Fed, the market is still expecting the Fed to raise interest rates by +100 basis points over the next 2 FOMC meetings. The Fed is also going to begin winding down its balance sheet – STARTING TOMORROW! That means that the Fed will sell as much as $30 billion Treasury notes and $17.5 billion Mortgaged-Backed Securities throughout the month. The increased selling pressure could cause bond yields to climb, which can certainly cool the risk-on sentiment in growth stocks. On Friday, we will get the monthly employment numbers from the Bureau of Labor Statistics, which WILL CERTAINLY have an impact on Fed policy…as it is part of its dual mandate. The report is expected to continue its recent trend of strength in the labor market. Stronger than expected numbers in this case would be perceived as being negative for the rally as a tight labor market typically leads to more inflation. Earnings season has, for the most part, ended for Q1 and we have seen lots of negative forward guidance resulting from supply chain and inflationary pressures. Believe it or not, Q2 earnings season is just a month and a half away, and there is an increasingly good chance that the pains from inflation will continue to vex companies. Finally, let’s not forget the continuing rise in commodity prices. Commodities have been on a tear as a result of the war in Ukraine. More and more supply curbs are being exacted on Russian energy products which has resulted in massive jumps in prices. As energy is critical for virtually all industry, it is, and will continue to impact inflation. Additionally, grain product from Ukraine is unable to leave the country causing massive supply shortages and further price hikes. Despite the US having plenty of its own supply, prices are set based on global supply and demand, so the war in Ukraine can impact the price you pay for breakfast cereal in the US. The bottom line is that inflation has not ceased as yet, the Fed is still in monetary tightening mode, and the US economy, while strong today, can easily stall as demand for goods weakens further. So, if you are wondering what to do next, remember that tomorrow, June 1^st also marks the beginning of Hurricane season, and The National Oceanic and Atmospheric Administration (NOAA) is expecting it to be a volatile one. It could get hot, so stay frosty!

FRIDAY’S MARKETS

Stocks rallied on Friday after the Fed’s favorite inflation number showed a moderation last month. The S&P500 gained +2.47%, the Dow Jones Industrial Average climbed by +1.76%, the Nasdaq Composite Index rose by +3.33%, and the Russell 2000 Index advanced by +2.70%. Bonds climbed and 10-year Treasury Note yields slipped by -1 basis point to 2.73%. Cryptos stalled by -3.39% and Bitcoin lost -2.41%.

NXT UP

• FHFA House Price Index (March) is expected to have risen by +2.0% after rising by +2.1% in the prior period.
• MNI Chicago PMI (May) is expected to have fallen to 55.0 from 56.4.
• Conference Boad Consumer Confidence (May) may have slipped to 103.9 from 107.3.
• Later this week, we will get PMIs, JOLTS Job Openings, Factory Orders, ADP Employment Change, Fed Beige Book, and the monthly employment numbers. Please refer to the attached calendar for times and details.