After finishing down in the past 10 of 11 weeks, markets finally showed signs of life last week. A sharp rally helped boost the S&P 500 out of bear market territory, while the Dow added more than 800 points late in the week.
The major catalyst for the improvement: economic data, which offered several signals that the Federal Reserve’s monetary tightening actions are starting to have an effect on inflation (and slowing the economy). On Tuesday, the National Association of Realtors reported that May existing home sales fell to their lowest level in two years, and the group’s chief economist predicted further declines ahead as mortgage rates continue to climb.
The Chicago Federal Reserve also reported its gauge of national economic activity had reached an eight-month low, while June manufacturing activity came in well below forecasts. That may sound like bad news, but traders welcomed the data because it also showed that manufacturing input inflation fell to its lowest level in five months, while output charge inflation (the prices companies charge) had reached its lowest level in over a year.
Friday was the best day for investors last week, despite the University of Michigan saying consumer sentiment reached 40-year lows in June. The report also showed consumers are coming to terms with inflation sticking around for a while. Meanwhile, Federal Reserve Chairman Jerome Powell testified before Congress mid-week, saying central bankers “do not think” they will need to provoke a recession to get inflation under control. However, he did say that a recession is “certainly a possibility” because achieving price stability is “absolutely essential” to the Fed.
Powell also said that inflation expectations currently seem to be anchored, and his comments boosted equity and fixed income markets. Futures markets began pricing a slightly higher chance of a 50 basis point (0.50%) Fed funds rate increase in the next meeting, although it still seems more likely the Fed will bump the rate by another 75 basis points (0.75%).
While we have a long way to go toward making up this year’s losses, markets finished the week in an optimistic mood. Will the positive trend continue this week? Only time will tell.