A run of mixed economic data is dragging the U.S. dollar, stalling a rally that has rippled through the economy and financial markets. However, inflation data this week could be a game-changer.

Behind the slip has been a subtle shift in the economic landscape. According to recent economic reports, American consumers are still spending money at a rapid pace, with employers adding jobs, extending the trends that have helped to lift the dollar over the last year.

Stocks struggled to move forward in the past week. With Friday’s sell-off, the major indexes closed off the four days with losses. That was disappointing to investors looking for a similar upside to the week before Memorial Day, during which the S&P 500 gained about 6.5%.

A recent type of rally like we saw last week and some of what it contained look a little more typical of bear market rallies. While the S&P 500 briefly dipped into a bear market on May 20, it has not closed with a 20% decline from its high. It shows that the sentiment environment is not universally bearish enough yet.

This week, the economic calendar is relatively light. The Consumer Price Index and Consumer Sentiment, released on Friday, are the most important reports. May’s CPI is expected to be just slightly cooler than April's, and some economists are expecting to confirm that inflation has peaked.

If CPI comes in at or near-consensus at around 8.2%, we think investors could feel more optimistic as the market’s late May breakout helped with the sentiment. This is despite stocks backtracking in the past week. Investors are in a more constructive place, and that can carry through if CPI is anywhere near consensus or better.

Headline inflation, including food and energy, was running at 8.5% in March, and the hope is that CPI will ease from here to half that level by year-end, but CPI will be affected by the jump in gasoline prices in May. Used car prices and food costs could also be factors.

Cleveland Fed President, Loretta Mester, said last Friday that she does not see enough evidence inflation has peaked, and she is on board with multiple half-point rate hikes to combat it. Fed officials are in a quiet period in the coming week ahead of their meeting on June 14.

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Fullerton Markets Research Team
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