Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
U.S. equity markets rose last week, recording their first weekly gain in four weeks, recovering somewhat after sharp losses in the prior week when the S&P logged its worst weekly performance since March 2020. The move upward was driven by expectations that the Federal Reserve may reduce the scale of its interest rate hikes at upcoming meetings, as weaker-than-expected economic data raise the possibility of a recession. For the week, the Dow Jones Industrial Average rose 5.4%, the S&P 500 gained 6.5%, while the Nasdaq Composite added 7.5%. Meanwhile, the yield on the 10-Year U.S. Treasury note fell 10bp on the week to 3.13%, as investors sought refuge in government bonds and other safe haven assets as recession fears rose. Crude oil prices fell following a sharp decline on Tuesday, as high gas prices and a worsening economic outlook raise the prospects for a demand slowdown in the U.S. Prices for West Texas Intermediate (WTI) crude closed the week at $107.55 per barrel, down 0.3% after a 10.5% drop in the previous week. Gold was down 0.6%, adding to the prior week's 1.9% drop.
Signs that inflation might be moderating as economic growth slows helped stocks rally sharply over the holiday-shortened week, lifting the S&P 500 Index out of bear market territory. Slower economic growth expectations led to modestly lower interest rate increase expectations, which helped spark the rally in equity markets. Nearly every sector in the index recorded strong gains. Energy stocks were the notable exception, as oil continued to back off from its recent highs. Fed Chair Powell delivered his semiannual testimony to Congress last week, though there was little change to his monetary-policy narrative that the Fed is committed to bringing inflation down and will remain alert to the evolving economic landscape. He did caution that further upside surprises to inflation could be in store and conceded that Fed hikes could provoke a recession. Powell also reiterated that a soft landing might be very challenging to attain.
While it was a light week of domestic economic data, new reports continued to underwhelm. The final readout of the University of Michigan consumer sentiment survey was in focus after Chair Powell mentioned the preliminary read at the June FOMC meeting. While the headline read continued to move lower, there was focus on slightly softer readings for one- and five-year inflation expectations. Elsewhere, May housing data were mixed, with existing-home sales falling month over month, but not as sharply as forecast, and May new-home sales actually increased. Weekly initial jobless claims were above consensus, but remained in their recent range. Finally, June's flash Markit US composite PMI missed, with manufacturing seeing the first contraction in new orders since July 2020 while services showed the steepest drop in client demand in more than two years.
There is a much busier economic calendar in the week ahead. Market watchers will receive new updates on the state of the housing market, with the release of May pending home sales ;and the S&P Case-Shiller Home Price Index tracking home price growth in April. The final reading for first-quarter GDP growth will be released Wednesday, along with corporate profits, and consumer spending data for the first quarter of the year. On Thursday, new inflation data will arrive with the release of the June update to the Personal Consumption Expenditures (PCE) price index. PMI surveys gauging the strength of the goods-producing industry will be issued later in the week, with the release of the Chicago PMI and ISM Manufacturing PMI on Thursday and Friday, respectively. OPEC+ meets on Thursday and is expected to approve a 648K barrel per day output increase for August. On the corporate earnings front, we can expect earnings from Nike, Jefferies Financial Group, General Mills, Micron Technology, and Walgreens, among others.
As always, we will be watching and reporting to you next week. Thank you.
