Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
Major U.S. equity benchmarks were lower last week. The S&P 500 Index had posted gains the previous three weeks and hit a fresh all-time high Monday, but ended the week in negative territory. The S&P 500 declined by nearly 1.0%, the Nasdaq fell 1.9%, the Dow Jones Industrial Average slipped 0.5%, and the Russell 2000 dropped by 5.1%. The reflation trade was scrutinized again last week amid continued focus on the peak growth, peak profit, peak inflation, and peak policy themes. The U.S. 10-year treasury yield ended the week at 1.29%, down seven basis points from the previous Friday’s close. Gold gained 0.2%, ending the week at $1,811/oz. West Texas Intermediate Crude Oil fell 4.1% to end the week at $71.48/barrel.
Federal Reserve Bank Chair Powell's semiannual testimony to Congress occurred last week with no real surprises in his prepared remarks or responses in his press conference. Legislators peppered him with questions about inflationary pressures, but he steadfastly maintained his view that some pressures would abate as supply chain bottlenecks dissipated. He also stressed that the Fed would monitor prices and act appropriately when needed. Last week also signaled the beginning of second quarter earnings season. According to FactSet, S&P 500 earnings are expected to increase 64% year over year in the second quarter. This would represent the highest year over year rate of growth since the 109.1% seen in Q4 2009. Upside surprises are expected to be driven by outsized estimate cuts early in the pandemic, a better macro backdrop underpinned by massive fiscal and monetary stimulus, reopening and vaccine momentum, and elevated profit margins. Supply chain constraints, input price pressures, and pricing power are widely expected to dominate the discussion on Q2 earnings calls.
There were several major U.S. economic releases last week. The National Federation for Independent Business released its optimism index, which rose 2.9 points to 102.5 in June, an eight month high. A larger share of small business owners expected the economy to improve, while more said they plan to expand and hire. A record 39% of owners reported they raised compensation as firms had difficulty filling open positions. The consumer price index rose in June by the most since 2008, beating all forecasts. Headline CPI rose 0.9% month-over-month and 5.4% year-over-year. Excluding volatile food and energy components, core CPI rose 4.5% from a year earlier, the largest advance since November 1991. Used vehicles accounted for more than a third of the gain in headline CPI. The Fed continues to expect these increases to normalize. June retail sales beat expectations, rising 0.6% for the month, reflecting broad-based gains across spending categories. Nine of 13 retail categories posted gains in June sales, with solid performance for electronics and appliance outlets, clothing stores and restaurants.
In the week ahead, the European Central Bank, South African Reserve Bank, and the Bank of Russia announce interest rate decisions. Amazon.com founder Jeff Bezos goes to space aboard one of his own rockets, accompanied by his brother and the youngest (18 years old) and oldest (82 years old) people ever to fly to space. The Summer Olympics begin in Tokyo on Friday. The city is under a state of emergency due to rising COVID-19 infections, so spectators are banned from all events. Second quarter earnings season continues throughout the week. The U.S. economic calendar includes housing starts, preliminary Markit PMIs, and existing home sales. The report on existing home sales will indicate if rising home prices and limited inventory continue to weigh on home buying. Sales of previously owned homes have declined in the four most recent reports.
As always, we will be watching and reporting to you next week. Thank you.
