The recent market performance saw a shift in sentiment as major US indices ended their winning streaks. The S&P 500, Nasdaq, and Dow all experienced declines, attributed to various factors, including hawkish comments from Fed Chair Jerome Powell and an unexpected rate hike by the Bank of England. Concerns about overvaluation have emerged as central banks maintain their hawkish stance.
Light Economic Calendar but Key Data Ahead:
As we enter the final week of June, investors will closely monitor some key data sets that could provide insights into the market's performance in the second half of the year. The most important is the core personal consumption expenditures (PCE) index, the preferred inflation gauge of the Federal Reserve. The upcoming report, scheduled for Friday, is expected to show a 0.3% increase in the core PCE in May, with a year-over-year rise of 4.6%. While still above the Fed's target, inflationary pressures have shown signs of easing in recent months.
Housing Data and Market Strength:
Additionally, attention will be on next week's housing data to determine if the May housing starts report indicates sustained growth in the sector. The strength of these reports will influence investor confidence in the market rally, with implications for the second half of the year.
Cash and Bonds Tempt Equity Investors:
An ongoing challenge for the stock market is the allure of cash and bonds, offering attractive returns to cautious investors amidst recession fears. Many have redirected their savings into short-term Treasuries, impacting stock market performance.
Factors Influencing Investor Sentiment:
Looking ahead, several factors could continue to impact investor sentiment in the coming weeks and months. Rising inflation is a crucial concern, potentially prompting central banks to accelerate interest rate hikes. This could lead to a substantial correction in the stock market as higher interest rates diminish the appeal of stocks.
Short-term Setback or Prolonged Downturn?
While last week's decline in the US stock market raises questions, it remains uncertain whether this is a temporary setback or the beginning of a more prolonged downturn. The upcoming data releases will provide valuable insights into the overall health of the economy.
Conclusion:
Investors eagerly await the core PCE index report and housing data to gauge market direction. With inflation and interest rates playing pivotal roles, the stock market's future trajectory hangs in the balance.
Fullerton Markets Research Team
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