“What remains critical is that even though the Federal Reserve is likely to remain hawkish until the peak in interest rates and the Fed balance sheet reduction -- both of which are expected in September -- inflation expectations are plummeting and nominal rates are cooling down,” Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said in a note. “We sense not only are we passing ‘peak Fed’ but that more positive catalysts will arrive by the fourth quarter as inflation decelerates, China stimulus accelerates and the US midterm election campaigns heat up.”
“I don’t think we’ve seen the bottom,” said Steve Sosnick, chief strategist at Interactive Brokers, in a phone interview Tuesday. Investors “haven’t thrown in the towel,” he said, meaning they haven’t yet capitulated in this year’s slump.
Analysts said last week’s bounce was technically overdue, coming as the selloff that took the S&P 500 to the brink of a bear market on May 19 left the market stretched to the downside by several measures.
The move to the downside saw steep sector selloffs that ranged from -2.6% for consumer staples to 34.3% for consumer discretionary, while the percentage of sub-industries trading below their 50- and 200-day moving averages were more than two standard deviations below their 27-year means, noted Sam Stovall, chief investment strategist at CFRA, in a note. The S&P 500 12-month forward earnings-per-share estimates declined to 16.8 times price — down 1.1% from its 20-plus year average and the lowest reading since April 2020.
“These extremes hinted quite loudly that, like the release of an overstretched rubber band, the market was primed for at least a short-term snapback,” Stovall said. “And snap it did…The only question remaining is whether this rally will extend or evaporate. We remain skeptical of this rally’s sustainability.”
*A hawkish speech delivered Monday by Christopher Waller, a Fed governor, didn’t seem to help sentiment in early trade. Waller said he supports half percentage point interest rate increases until there are signs inflation is cooling toward its 2% target. The core reading of the Fed’s preferred inflation gauge was 4.9% in April.*
The yield on the 10-year Treasury note rose 9.4 basis points Tuesday to 2.842%, according to Dow Jones Market Data.
*Waller said the May employment and CPI reports will be key pieces of data “to get information about the continuing strength of the labor market and about the momentum in price increases.” The May jobs report is due on Friday, and the CPI report is set for release the following Friday.*
*President Joe Biden met with Federal Reserve Chair Jerome Powell Tuesday afternoon to discuss the economy and inflation. In an op-ed in The Wall Street Journal, Biden said he would not seek to influence the Fed’s decisions.*
*In U.S. economic data released Tuesday, the Conference Board’s index of consumer confidence fell slightly in May to 106.4 from 108.6 in April, reflecting worries about high inflation and a slowdown in the economy. Economists polled by The Wall Street Journal had forecast the index to total 103.9.*
“The consumer is not panicking,” said Sosnick, of Interactive Brokers. He found the survey “relatively encouraging,” saying the results beat expectations while the findings for April were revised higher.
*Spending plans are cooling but not plummeting as financial conditions tighten. This is exactly what Federal Reserve policy makers want to see. Buying plans for large ticket items such as autos and homes are holding steady, revealing a fairly stable consumer sector. The economy will most likely avoid a recession in the near term as the Fed successfully navigates a ‘softish’ landing.*
*U.S. home prices rose again in March even as higher mortgage rates began to bite, leaving prices at all-time highs. The S&P CoreLogic Case-Shiller 20-city price index was up a record 21.2% year over year while the federal government’s price tracker climbed 19% in the same span.*
By: via @AlliesFin Serve Stock Market
