Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
The major U.S. equity indices ended the week lower following a higher-than-expected Consumer Price Index (CPI) report mid-week. For the week, the Dow Jones Industrial Average fell 0.2%, the S&P 500 declined by 0.9%, and the Nasdaq Composite ended the week 1.6% lower. Bond prices rallied last week, with the yield on the 10-year U.S. Treasury note declining to 2.93% at the end of the week as demand for safe-haven assets continued to rise. The yield curve inversion also deepened, with the yield on the two-year Treasury note at 3.12% exceeding that of the 10-year note. Oil prices fell steeply amid lingering concerns about a potential global recession and slowing demand for fuel in the U.S. market. The price of West Texas Intermediate (WTI) crude fell from $104 per barrel at the start of the week to just over $97 per barrel on Friday, down 6.9% for the week. The U.S. dollar index was up 1.0%, higher for a third-straight week. Gold finished the week down 2.2%.
U.S. CPI accelerated to a 40-year high of 9.1% year-over-year in June, the Bureau of Labor Statistics reported last Wednesday. The increase was broad-based, with the indexes for gasoline, shelter, and food being the largest contributors. The energy index rose 7.5% over the month and contributed nearly half of the all-items increase, with the gasoline index rising 11.2%. The Core CPI index for all items less food and energy rose 5.9% over the past 12 months. The high inflation numbers led interest rate futures markets to price in a 90% chance of a 100 bp interest rate increase at the upcoming July FOMC meeting. However, the odds of a 100 bp hike declined late in the week, falling below 30% on Friday, after Fed Governor Waller said a 75 bp rate hike is his base case for July.
Despite the dismal CPI report, there was more hope that inflation may be peaking. The Michigan Consumer Sentiment report showed 5-year inflation expectations down to 2.8%, the lowest in a year. Gasoline prices also fell to four-week lows, with the demand destruction dynamic in focus after a Department of Energy report showed gasoline demand down by 1.35 million barrels per day, or more than 10%, in recent weeks. Further, commodities continued their recent selloff, with copper falling to a 20-month low, down 35% from the record prices of four months ago.
Investors will be keeping their eyes on the economic calendar as well as the continuation of earnings season in the week ahead. On the domestic economic front, a big week of housing data includes Monday's July NAHB builder confidence, Tuesday's June housing starts and building permits, and Wednesday's existing home sales. Friday brings Markit July flash PMIs, which are expected to reveal sequential weakening after manufacturing new orders fell into contraction last month. On the corporate earnings front, the week will be an eventful one dominated by blue chip names like Bank of America, Goldman Sachs, IBM, Johnson & Johnson, Lockheed Martin, Netflix, Tesla, United Airlines, AT&T, Snap, and others. Overseas, the European Central Bank (ECB) is widely expected to raise its benchmark interest rate for the first time since 2011. Finally, the U.K. and Japan are set to release their latest inflation figures tracking the month of June, providing an update on global price pressures.
As always, we will be watching and reporting to you next week. Thank you.