Critical Inflation Data Improves, Putting Final Bow on Strong Q2 for Stocks

It’s the final day of the quarter—and the last chance for fund managers to move in and out of positions before sending quarterly reports to clients. While much of this activity might be over, volatility may still crop up amid some last-minute shuffling of the decks.

Despite that, volume might ease later in the day as many head home early, although the markets are open Monday ahead of Tuesday’s Independence Day holiday. Anyone trading Friday (and Monday) should be prepared for potential sharper moves than usual amid possible sparse volume. Consider keeping any trades on the smaller side or wait until everyone’s back next Wednesday.

U.S. stock trading on Monday closes at 1 p.m. ET.

Morning rush

• The 10-year Treasury note yield (TNX) slipped to 3.83% after the PCE data.
• The ($DXY) dropped to 103.07 but remains on the high end of the recent range.
• Cboe Volatility Index® () futures are steady at 13.4.
• WTI (/CL) rose to $70.18 but is on pace for another lower quarter.

A cautionary note: The 10-year Treasury note yield brushed against the top of its long-term range yesterday near 3.85%. This might reflect recent firm data as well as growing beliefs that the Fed may have a July rate hike up its sleeve. Higher yields possibly hindered tech shares yesterday, as growth stocks tend to be sensitive to rising borrowing costs. However, small-caps share that trait but finished much higher Thursday.

Just in

U.S. personal spending rose just 0.1% in May, lower than the 0.3% consensus and down sharply from 0.8% in April. Personal income rose 0.4%, in line with expectations and up from 0.3% in April.

China watch: Overnight data from China suggest the recovery is proceeding more slowly than some analysts had expected. Factory activity fell in June for the third consecutive month, as tracked by the country’s official Manufacturing Purchasing Managers’ Index (PMI) data. The headline figure of 49 in June was up from 48.8 in May but remained in contractionary territory below 50. Key indicators like new orders, exports, and buying activity remained sluggish.

Eurozone discount: Turning west, inflation figures from Europe showed Consumer Price Index (CPI) growth hitting a 17-month low of 5.5% in June. However, the core inflation rate, stripping out food and energy, ticked upward. Even so, European stocks are solidly higher today.

Eye on the Fed

Futures trading indicates an 86% probability that the Federal Open Market Committee (FOMC) will raise rates 25 basis points at its July meeting, according to the CME FedWatch Tool.

The Fed speakers calendar is a bit barren today and next week. Perhaps they need a holiday, too. Fed minutes from the June 13–14 meeting are due out Wednesday afternoon and could draw more attention than usual, considering many market participants remain puzzled by the FOMC’s unanimous “pause” vote even as they dialed up projections for future rate hikes. The minutes might reveal the debate behind that, perhaps letting investors know if there was some sort of tacit agreement to pause now while warning about continued hawkishness later.

Jobs data loom: The Fed minutes come two days before the government’s June Nonfarm Payrolls report next Friday morning—the next major touchpoint on the rate calendar. If jobs growth, wages growth, or both are much higher than expected, that could cement ideas that the Fed will hike in July and perhaps again in September. According to Trading Economics, analyst consensus for jobs growth is now 200,000—down from 339,000 in May—and for wage gains of 0.3%, unchanged from May.

What to Watch

Sentiment ahead: Just after today’s open comes the final June University of Michigan Consumer Sentiment reading. Consensus is for a headline figure of 63.9, Briefing.com says. That would be up sharply from 59.2 in May and the highest monthly figure since February. The consumer confidence index from The Conference Board earlier this week showed a decent uptick, so we’ll see if that carried over into the Michigan data. Also, carefully watch inflation expectations, which fell to 3.3% in the preliminary June report, from May’s 4.2%. That represented the lowest level since March 2021.

Monday blues: If you take Monday off between the weekend and the holiday, you might miss a critical report. The June ISM Manufacturing Index due out at 10 a.m. ET on Monday provides broad insight into U.S. manufacturing sector health. Consensus sees it improving slightly to 47.2 in June from 46.9 in May, but that’s still below the 50 needed to demonstrate expansion. It’s contracted seven months in a row.

Stocks in the Spotlight

Nike (NYSE:) shares swooshed lower in premarket trading after the athletic shoe company posted a sweet and sour earnings report. Margins remain a challenge, partly accounting for Nike’s slight miss of Wall Street’s bottom-line forecast and likely weighing on shares. Revenue, however, exceeded expectations, as did sales in the key China and North American markets.

Tesla (NASDAQ:) could report record quarterly deliveries, Reuters reports, thanks in part to discounts and other incentives. The company could unveil Q2 delivery data as soon as this weekend, and analysts surveyed by Refinitiv expect global deliveries of 445,000. That would be up 5% from the previous quarter.

Apple (NASDAQ:) shares climbed nearly 1% in premarket trading, taking the stock back to a $3 trillion market capitalization for the first time since early 2022.

Yesterday ended on an upbeat note amid more evidence of the rally widening. The best-performing sectors Thursday were financials, materials, and energy, followed closely by industrials and real estate. Tech was a distant seventh on Thursday’s sector scoreboard despite its huge lead year-to-date.

It was only one day, but not the first recent session to reflect possible rotation into sectors that lagged earlier this year. Strong data such as yesterday’s final Q1 Gross Domestic Product (GDP) estimate from the government could drive expectations for a broader economic recovery that lifts more boats.

CHART OF THE DAY: SHINY QUARTER: The major indexes had a nice Q2, but the Nasdaq 100 (NDX— blue line) easily outpaced the S&P 500 (SPX—purple line) and the (RUT—candlesticks). The RUT did start to narrow the gap toward the end of the quarter, however. Data sources: S&P Dow Jones Indices, Nasdaq, Russell. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

No break: Volume often takes a holiday of its own ahead of a market holiday. That may not be the case this week as investors prep for their July 4 cookouts and fireworks. First, today is a heavy data day. Second, it isn’t exactly a holiday weekend because the market is open on Monday, at least until 1 p.m. ET. The actual holiday is Tuesday, making for an odd schedule next week. Investors tempted to take Monday off might want to at least check in that morning. The ISM Manufacturing Index sometimes moves markets, but if that’s not the case this time, you could always go back to bed.

Second-half shuffle? A fresh quarter could bring some sector rotation, as investors sometimes use the new calendar page as an opportunity to go in a fresh direction. Some of that surfaced in late June, with beaten-down sectors like real estate, utilities, and financials flashing green at times, including yesterday for some of those. Whether that’s a trend or just an early-summer twist remains to be seen. At the same time, some concern has risen about the widening curve between the 2-year Treasury note yield and the 10-year Treasury note yield. There’s a high correlation between the S&P 500® Index (SPX) and the 2-year yield that implies a possible pullback ahead for stocks. Current light volatility and improved investor sentiment also can be bearish signals, perhaps counterintuitively. On the positive side, the government’s surprising move to raise its Q1 GDP estimate to 2% from 1.3% yesterday hints that recession may have been avoided—at least so far. Economic strength tends to help so-called cyclical sectors like consumer discretionary and financials that sometimes do better in a growing economy.

Credit check: Rising rates led many economists to warn of risks to the credit market. For now, it seems relatively stable, at least judging from spreads in both investment grade and high yield markets. A recent report by Bloomberg Intelligence, however, warned of potential coming strains in the high yield market given the amount of debt maturing at the beginning of 2024 and how costly it will be for companies to reissue debt at these levels. This may be something to watch more carefully as fall approaches.

Calendar

• July 3: June Chicago PMI, June ISM Manufacturing Index, and May Construction Spending, and markets close early ahead of the holiday.
• July 4: Independence Day holiday, no U.S. trading.
• July 5: May Factory Orders.
• July 6: June ISM Non-Manufacturing Index and May JOLTS job openings.
• July 7: June Nonfarm Payrolls.

Happy trading,

Disclosure: TD Ameritrade® commentary for educational purposes only. Member SIPC. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

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