Weekly review

The market had a strong week, with a bullish bias and higher trading volume on the Nasdaq compared to the NYSE. Market participants were optimistic that the economy would avoid a hard landing and that the Federal Reserve was nearing the end of its interest rate hikes. This sentiment was supported by key economic data, including inflation indicators like the CPI, PPI, and Import-Export Price Index, which showed inflation trending favorably. Additionally, the weekly initial claims report indicated a healthy economy.

The highlight of the week was the CPI report, which showed smaller-than-expected increases in both total and core CPI. On a year-over-year basis, inflation rates decreased, with total CPI up 3.0% and core CPI up 4.8%. Treasury yields fell, leading to higher stock prices as predicted by Fundstrat's Tom Lee. The S&P 500 reached new highs during the week.

The Russell 2000 and the Invesco S&P 500 Equal-Weight ETF (RSP) posted gains for the week, matching the performance of the market-cap weighted S&P 500. Mega-cap stocks started slow but finished strong, outperforming the S&P 500 as a group.

All 11 S&P 500 sectors recorded gains, with communication services leading the way. The Q2 earnings reporting period began, with companies like Delta Air Lines, PepsiCo, JPMorgan Chase, Wells Fargo, Citigroup, and UnitedHealth reporting better-than-expected earnings.

Following the friendly CPI report, the fed funds futures market indicated a high probability of a rate hike at the July meeting but lowered the chances of additional hikes in the coming months. Some Fed officials remain open to a second rate hike but are waiting for more data. The stock market and the fed funds futures market favor the view of one rate hike.

The dollar faced pressure as other central banks, such as the ECB and Bank of England, were seen as having more room for rate hikes. As a result, the U.S. Dollar Index experienced a significant decline. Commodity prices, including oil and copper, increased during the week, despite weak data from China, which led to calls for more policy stimulus.

Monday:

The stock market had a decent performance on Monday, although the gains in the major indices were relatively modest. Both the market-cap weighted S&P 500 and the Invesco S&P 500 Equal Weight ETF (RSP) saw increases, but the Vanguard Mega Cap Growth ETF (MGK) experienced some losses due to declines in mega-cap stocks like Apple, Alphabet, and Microsoft. Despite this, the broader market held up well, with small caps, banks, energy, and semiconductor stocks outperforming. The positive bias was evident as advancers outnumbered decliners at the NYSE and the Nasdaq. On Monday, economic data showed that May wholesale inventories remained unchanged.

Tuesday:

Tuesday was a good day for the market, with the major indices closing near their highs. The market-cap weighted S&P 500 and the Invesco S&P 500 Equal Weight ETF (RSP) both recorded gains, while the Vanguard Mega Cap Growth ETF (MGK) recovered from earlier losses to end the day with a modest gain. Advancers outnumbered decliners at the NYSE and the Nasdaq, reflecting a positive bias in the market. Small caps and value stocks outperformed their large-cap and growth counterparts. The NFIB Small Business Optimism Survey for June also showed an increase.

Wednesday:

The stock market responded positively to the June Consumer Price Index (CPI) on Wednesday, leading to new 52-week highs for the S&P 500 and Nasdaq Composite. Treasury yields took a sharp turn lower in response to the CPI data, acting as another support factor for the stock market. The 2-yr note yield dropped by 16 basis points to 4.73%, and the 10-yr note yield decreased by 12 basis points to 3.86%. The U.S. Dollar Index declined for the fifth consecutive day, falling 1.2% to 100.54.

Expectations of further rate hikes after the July FOMC meeting declined following the CPI report. According to the CME FedWatch Tool, the probability of another 25 basis points rate hike is now low for the September, November, and December meetings. Wednesday's rally was fairly broad, and mega-cap stocks performed well after lagging in previous sessions.

On Wednesday, the CPI for June showed a smaller-than-expected increase in both total and core CPI. On a year-over-year basis, inflation rates decelerated, providing evidence of encouraging disinflation. Weekly EIA Crude Oil Inventories showed a build of 5.95 million barrels.

Thursday:

Stocks had another strong day, with the S&P 500 and Nasdaq Composite closing near their highs, although the Dow Jones Industrial Average lagged behind. The rally was driven by the belief that the economy will avoid a hard landing and that the Federal Reserve is nearing the end of its rate hikes. This belief was supported by better-than-expected economic data, including the Producer Price Index (PPI) for final demand, which showed moderating inflation pressures. Treasury yields continued to decline, providing further support for the stock market. Positive sentiment was also fueled by strong earnings reports from Delta Air Lines and PepsiCo, as well as the news of Exxon Mobil's acquisition of Denbury.

Economic data on Thursday included the Producer Price Index for final demand, which increased by 0.1% in June, and initial jobless claims, which decreased to 237,000. The PPI report indicated that wholesale inflation pressures are moderating, benefiting companies with pricing power. The labor market remains solid, with jobless claims remaining below recession-like levels.

Friday:

Friday's market performance was not as favorable, as profit-taking expectations weighed on stocks following a strong week. The Russell 2000, which had seen significant gains earlier in the week, experienced the largest decline among the major indices. The energy sector was the hardest hit, down 2.8% due to lower oil prices. However, the health care sector showed strength, with UnitedHealth contributing to its outperformance and helping the Dow Jones Industrial Average remain positive. Market internals reflected the profit-taking sentiment, with decliners surpassing advancers by a margin of 3-to-1 at the NYSE and 2-to-1 at the Nasdaq. The NYSE also saw lower-than-average trading volume. On the economic front, the preliminary July University of Michigan Consumer Sentiment Index came in higher than expected, reflecting improved consumer sentiment about the economic outlook. Import prices declined in June, while export prices also saw a decrease. Import prices were down 6.1% year-over-year, and export prices were down 12.0% year-over-year.

Previous update:

The market had a slow start to the week as many participants extended the Fourth of July break into a four-day weekend. Some catalysts prompted investors to take profits after a strong start to the year for stocks. The Invesco S&P 500 Equal Weight ETF (RSP) showed a smaller decline than the market-cap weighted S&P 500 due to weakness in mega-cap stocks. Geopolitical concerns and worries about global growth emerged early in the week following weaker-than-expected Services PMI readings from China and the eurozone. The US also expressed intentions to restrict China's access to cloud computing, and China announced new restrictions on exporting gallium and germanium.

Later in the week, rising market rates became the primary driver of selling pressure in the stock market. The 2-year Treasury note yield rose, settling above the 5.00% level, and the 10-year note yield climbed back above 4.00%. The ADP Employment Change and ISM Non-Manufacturing Index for June came in stronger than expected, contributing to rising yields. However, Treasury yields pulled back from their peak levels after the Employment Situation Report for June indicated that payroll gains were not as robust as estimated by the ADP report.

The employment report also revealed an increase in the average workweek and average hourly earnings, suggesting continued spending growth and supporting the narrative of a soft landing for the economy. Nevertheless, the rise in rates raised concerns about valuations in the stock market, with investors considering the possibility of the Federal Reserve being more aggressive in its tightening actions. While a rate hike in July is almost certain, expectations for rate hikes at future meetings increased.

Despite the rising probabilities, the market still holds a "one-and-done" view, as reflected in the fed funds futures market. Probabilities for a second rate hike at the September, November, and December FOMC meetings remain relatively low. The upcoming June Consumer Price Index report may impact these probabilities.

The release of the FOMC Minutes for the June meeting did not contain any surprises and did not significantly impact the market. Rising interest rates are receiving increased attention as they create competition for stocks and pose challenges for further multiple expansion efforts.

During the week, only the real estate sector saw a gain, while the utilities, communication services, and consumer discretionary sectors experienced minimal declines. The health care, materials, and information technology sectors were the worst performers.

On Monday, which marked the start of the new month, quarter, and second half of the year, the stock market closed slightly higher. Trading volume was lighter due to the early close ahead of the Fourth of July holiday, but still decent for a shortened trading session. The major indices traded around their flat lines throughout the session, ending with modest gains. Notable standouts included EV makers Tesla and Rivian, which impressed investors with their Q2 delivery numbers. Additionally, regional banking and bank ETFs rose following capital return plans announced by some banks after the stress test results.

Economic data released on Monday showed a contraction in the manufacturing sector for the eighth consecutive month, indicating weakening optimism for the second half of the year. Construction spending, particularly in new single-family construction, demonstrated strength despite rising mortgage rates.

Markets were closed on Tuesday for the Fourth of July holiday.

On Wednesday, the major stock indices experienced losses ranging from 0.2% to 1.3%. Market participants took some profits off the table as there was a lingering sense that the market was due for a pullback following its strong performance in the first half of the year. Several catalysts contributed to this sentiment, including geopolitical concerns and worries about global growth. Services PMI readings from China and the eurozone came in weaker than expected, and there were news reports about the US looking to restrict China's access to cloud computing and China imposing restrictions on exporting gallium and germanium.

The release of the FOMC Minutes for the June meeting also led to some knee-jerk selling, but the minutes did not contain any surprising information and the market quickly recovered from the initial selling pressure. Economic data for the day showed a modest increase in factory orders, although new order activity remained weak when excluding transportation.

On Thursday, the major indices all registered losses, but they rebounded from their intraday lows around mid-morning. There was no specific news to account for the rebound, but it coincided with market rates sliding back from their peak levels. Rising market rates were the primary driver of the retreat, prompting investors to take more profits after the strong start to the year. The 2-year and 10-year note yields rose in response to strong labor data and a better-than-expected ISM Non-Manufacturing Index for June.

The increase in rates raised concerns about valuations in the stock market and the possibility of the Federal Reserve being more aggressive with its tightening actions. The day's economic data included the weekly MBA Mortgage Applications Index, which showed a decline, and the ADP private sector hiring report, which came in stronger than expected. Initial jobless claims increased slightly, while the trade deficit narrowed. The final IHS Markit Services PMI reading for June decreased, while the ISM Non-Manufacturing Index increased, indicating an expansion in the services sector. Weekly EIA Crude Oil Inventories showed a draw of 1.51 million barrels.

Friday saw mixed performance in the major stock indices. While the session started positively, the afternoon trade witnessed a decline in some mega cap stocks, resulting in a negative impact on overall index performance. However, there were still positive developments beneath the surface, with advancers outnumbering decliners. The Invesco S&P 500 Equal Weight ETF (RSP) recorded a modest gain of 0.3%, while the Vanguard Mega Cap Growth ETF (MGK) experienced a slight decline of 0.5%. During the session, small-cap and value stocks showed relative strength, reflecting the prevailing pro-growth sentiment in the market. The Russell 2000, a small-cap index, rose by 1.2%, and the Russell Value Indices outperformed their growth counterparts. The primary catalyst for market movements on Friday was the release of the Employment Situation Report for June. Nonfarm payrolls increased by 209,000, slightly below the consensus estimate of 220,000. Additionally, revisions to April and May data showed 110,000 fewer jobs than initially reported. However, average hourly earnings exceeded expectations with a stronger-than-expected increase of 0.4%. The year-over-year change in average hourly earnings remained unchanged at 4.4%. Overall, the report indicated a soft landing scenario, as payroll growth slowed but remained positive. The increase in the average workweek and average hourly earnings is positive for aggregate earnings and is expected to support both discretionary and non-discretionary spending.