Market's Struggle for Direction
Will PPI Surprise Again?
KR Opinion
The contrast between last Monday's market performance and this Monday's session is striking. While last week began with fears of Japan potentially triggering a global economic downturn, this week opened with a notably subdued session. The exception was the NASDAQ, which, despite having a weaker profile in recent analysis, emerged as the strongest performer among the major indexes.
Tuesday's session will unlikely mirror Monday's calm, as significant economic news is on the horizon. The Producer Price Index (PPI) is expected to show a 0.1% increase, a slight improvement from last month's 0.2% rise. While this forecast might not seem exciting, the market's reaction to this data will be crucial.
We find ourselves in a peculiar market environment where news interpretation is not always straightforward. There's an ongoing debate about whether the good news is bad for the market or if bad news is paradoxically good. This ambiguity is characteristic of pivotal periods in the market when overall sentiment is unclear, especially following the significant volatility and sharp recovery we witnessed last week.
The current quiet in the markets is likely to be short-lived. While volatility may continue declining despite Tuesday's upcoming PPI numbers, Wednesday's Consumer Price Index (CPI) release is expected to inject some volatility into the markets. However, other economic indicators scheduled for release this week suggest more range-bound, sideways activity, aligning with previous forecasts.
These reports seem unlikely to move the markets dramatically, and surprises are not widely anticipated.
Looking at the week ahead, the overall expectation is for volatility to decrease substantially from last week's levels. The market will likely continue its consolidation phase, maintaining a slight upward bias. There's a possibility of a dip on Wednesday, potentially in response to the CPI data, but this is expected to be followed by a recovery towards the end of the week.
This forecast shows a market catching its breath after recent turbulence, settling into a more stable pattern while still processing incoming economic data.
Looking Back on Monday’s action
Monday's market action painted a picture of cautious anticipation as investors braced for a week packed with crucial economic data. The S&P 500 barely budged, closing just a hair above Friday's level, while the Dow Jones Industrial Average dipped 0.4% and the Nasdaq Composite eked out a 0.2% gain.
This hesitancy comes as no surprise, with several market-moving reports on the horizon. Tuesday brings the Producer Price Index, followed by the Consumer Price Index on Wednesday. Retail Sales figures drop on Thursday, and we'll cap off the week with Housing Starts data on Friday. Each of these releases has the potential to shift market sentiment significantly.
Despite Monday's muted overall performance, the Information Technology sector stood out, rising 0.9%. Tech giants led the charge, with Apple gaining 0.7%, Microsoft up 0.2%, and NVIDIA surging an impressive 4.1%. Broadcom also contributed to the sector's strength with a modest 0.2% increase.
Energy stocks found support as oil prices spiked 4.1% to $79.91 per barrel on Monday. This jump was largely attributed to geopolitical tensions following the death of Hamas political leader Ismail Haniyeh, which raised concerns about potential retaliation from Iran or its allies against Israel.
On the downside, the real estate and communication services sectors both stumbled, each falling by 0.6%.
In economic indicators, the New York Fed's Survey of Consumer Expectations offered a glimmer of hope on the inflation front. While one-year and five-year inflation expectations held steady at 3.0% and 2.8%, respectively, the three-year outlook dropped to 2.3% - the lowest level since the survey's inception in 2013. This could signal a gradual easing of inflation fears among consumers.
The bond market saw a slight retreat in yields on Monday, with the 10-year Treasury yield dipping three basis points to 3.91% and the 2-year yield following suit, falling to 4.02%.
As we look ahead, market participants will be keenly focused on the upcoming economic releases. These reports will provide crucial insights into inflation trends, consumer spending, and the housing market - all key factors in assessing the overall health of the economy and potential future moves by the Federal Reserve.
In times like these, when the market seems to be holding its breath, it's important to remember that periods of calm often precede significant moves. Whether those moves will be to the upside or downside remains to be seen, but staying informed and prepared for various scenarios is key to navigating these uncertain waters.
S&P 500: +12.1% YTD
Nasdaq Composite:+11.8% YTD
S&P Midcap 400: +4.8% YTD
Dow Jones Industrial Average: +4.4% YTD
Russell 2000: +1.7% YTD
Reviewing Monday's economic data:
The July Treasury Budget revealed a deficit of $243.7 billion, compared to a $220.8 billion deficit in the same period last year. This July's deficit resulted from outlays of $574.1 billion, exceeding receipts of $330.4 billion. It's important to note that Treasury Budget data is not seasonally adjusted, so July's deficit cannot be directly compared to June's revised deficit of $70.9 billion.
The key takeaway from this report is that the U.S. government continues to run substantial budget deficits. Net interest costs, surpassing defense spending, are a significant factor driving these deficits.
Tuesday's economic calendar includes:
6:00 ET: July NFIB Small Business Optimism Index (previous reading: 91.5)
8:30 ET: July Producer Price Index (PPI)
- KR Forecast consensus: 0.1% increase
- Previous month: 0.2% increase
8:30 ET: July Core PPI (excluding food and energy)
- KR Forecast consensus: 0.2% increase
- Previous month: 0.4% increase
These upcoming reports, particularly the PPI data, will provide important insights into inflationary pressures at the producer level, which could influence future consumer prices and Federal Reserve policy decisions.
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