Feeling Bullish?
What a week in the stock market. Talk about volatility-we saw it this week as markets rallied toward their highs after a monumental sell off last week. The rally was encouraged by positive economic signs including bullish consumer spending at the same time new jobs numbers were lower than expected. Goldilocks economy appears again. We are seeing confirmation that the jobs market is weakening but consumer spending continues on the retail level increasing confidence that the Fed will lower interest rates in September and expectations are for at least one more rate reduction this year, maybe two depending on the data. Wal-Mart reported earnings above expectations confirming robust retail sales. The other report that converged with the goldilocks scenario is the consumer price index and producer price index. The CPI came in under 3% for the first time since 2022 confirming reduced inflation. Expected future inflation numbers reported by the Federal Reserve also confirmed the expectation of a continued drop going forward.
It’s interesting that value department stores like Wal-Mart and Target as well as fast food restaurants are reducing their prices because there is evidence that consumers are beginning to be price sensitive and resistant. Clearly the fiscal infusion from covid stimulus has worn off and the aftereffects of high inflation were inevitable. Also inevitable was the cooling of inflation as the stimulus wore off. Although consumer spending has held up, credit card balances are increasing rapidly. Even when interest rates decline, credit card borrowing interest rates will not decline measurably. However, mortgage applications are increasing as rates decline.
Preliminary GDP growth rate forecasts for the 3rd quarter ending in June are still higher than 2% and layoffs and employment remain positive although in the SF Bay Area we continue reading about lay-offs. This week Cisco announced a reduction in its workforce while reporting strong earnings.
Upcoming this month is the annual Federal Reserve meeting in Jackson Hole WY. There is much anticipation in regard to Chairman Powell’s speech as markets are looking toward the first-rate decrease. Can the Fed thread the needle for a soft landing? We will have a better idea as we approach the end of the year.
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