Key Points:
After some rally since the US inflation data announcement, the major US stock indexes experienced a turbulent session, ultimately closing in the red. The S&P 500 Index (Symbol: SP500) dropped by -0.21%, the Dow Jones Industrials Index (Symbol: DJ30) declined by -0.10%, and the Nasdaq 100 Index (Symbol: NAS100) fell by -0.21%.
Early optimism in the stock market was buoyed by the belief that the Fed could pivot towards a more Dovish stance. This sentiment was supported by a smaller-than-expected decline in weekly initial unemployment claims, suggesting a slightly softer labor market. The claims fell by -10,000 to 222,000, just shy of the forecasted 220,000. Additionally, weaker-than-expected reports on housing starts and manufacturing production added to the Dovish outlook.
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However, the momentum shifted dramatically following comments from Cleveland Fed President Loretta Mester and Richmond Fed President Thomas Barkin. Both emphasized the need for higher interest rates to persist for a longer period to combat inflation. Mester highlighted the importance of maintaining a restrictive policy stance, while Barkin pointed to persistent price pressures, particularly in the services sector, as a reason for caution.
These Hawkish comments led to a rebound from a 5-week low in the US 10-year T-notes (Symbol: TY), rising by +3.5 basis points to 4.375%. This in turn pressured the stock market to retreat lower.
Despite the overall negative sentiment, there were some Dovish remarks from New York Fed President John Williams. He noted that the softer CPI data from April was a positive development and suggested that the current monetary policy stance was appropriate. Williams’ comments provided some support to the market, albeit not enough to offset the Hawkish tones from his colleagues.
Economic data presented mixed signals, with inflationary pressures remaining a concern. The April import price index excluding petroleum rose by +0.7% month-over-month, the largest increase in 16 months.
However, the US housing market showed weakness, with April housing starts increased by +5.7% to 1.36 million, below the expected 1.421 million, and building permits fell by -3.0% to a 15-month low of 1.44 million.
Further, the Philadelphia Fed business outlook survey for May 2024 dropped to 4.5, below the forecast of 7.8.
Additionally, manufacturing production unexpectedly fell by -0.3% month-over-month, missing the expected +0.1% increase, further complicating the market outlook.
On the earnings front, Q1 results remained a bright spot, with S&P500 (Symbol: SP500) companies reporting stronger-than-expected performance. Earnings are projected to rise by +7.1% year-over-year, significantly above the pre-earnings season estimate of +3.8%. According to Bloomberg Intelligence, approximately 81% of S&P 500 companies have beaten Q1 earnings estimates, providing some support to the market.
Looking ahead, the market is pricing in a 10% chance of a -25 basis point rate cut at the June 11-12 FOMC meeting, with a 32% probability for the following meeting on July 30-31. However, this outlook could change rapidly based on upcoming economic data and Fed commentary.
Given the mixed economic data and the contrasting views from Fed officials, the market is likely to remain volatile in the near term. Traders should keep a close eye on upcoming economic reports and Fed commentary for further clues on the future direction of interest rates and inflation.
That said, market participants should remain disciplined in risk management when executing trade positions in the market.
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