A Pivotal Week for the Markets

Last week was quiet on the economic and data front. The one high frequency data indicator we did receive was jobless claims, which ticked up after a dull stretch of near constancy. The jobless claims figure came in at 231,000, which is at the higher end of my preferred range of 200-240k. There could be some seasonality impacting this report, as half of the increase came from New York and the jump could be tied to summer teaching schedules.

In addition, the University of Michigan Consumer Confidence Survey came out last Friday and dropped significantly, below expectations. This drop mirrors what we saw with the Conference Board Consumer Confidence Index indicators a couple of weeks ago. Lower consumer sentiment and jobless claims may be red flags that bear watching quite closely.

Also in the University of Michigan Consumer Confidence Survey, 1-year inflation expectations rose from 3.2% to 3.5%. These consumer inflation expectation reports are often highly correlated to oil and gas price increases—which had been rising from the conflict in the Middle East, although they have dropped in the futures markets in recent days. The higher gas prices also likely weighed on the consumer sentiment drop.

This upcoming week is quite critical on the data front. On Wednesday, we will receive both retail sales and the Consumer Price Index (CPI) reports. Expectations are for headline CPI to be 3.4% over the last 12 months, which is down from 3.5%, and for the core CPI to be 3.6%, down from 3.8%. A hotter than expected CPI could create more downside risk for stocks and bonds.

I’d like to see the Federal Reserve (Fed) cutting rates as soon as July, but the Fed will be data dependent. Thus, this is a very big week for the markets if data differs from expectations.