Market Minute
Weekly analysis from the FS Investments Research team
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July 15, 2024
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Equities
U.S. stocks gained as the June CPI report showed further progress on inflation. The market rotated heavily toward left-behind parts of the market like small-caps, which gained 6% and outperformed the Nasdaq 100 by the most since November 2020. Interest rate-sensitive industries such as real estate, utilities, and consumer durables all caught a bid, while the Magnificent Seven fell –1.71%. Whether this portends a “Great Rotation” will depend heavily on the Q2 earnings season, which began Friday with lukewarm results from Wells Fargo and JPMorgan. S&P 500 EPS is expected to grow 8.1% y/y, with the Mag 7 driving about half the growth.
Fixed income
Yields fell across the board in the wake of the friendly inflation data. Markets have now fully priced a Fed rate cut at the September 18 FOMC meeting and are toggling between 2 and 3 cuts total for the remainder of 2024. The 10-year fell 10 bps on the back of the CPI data and ended the week at 4.18%, the lowest since March. The 2-year similarly plunged –15 bps and finished the week at 4.45%. The Bloomberg Agg ended the week up 0.82% and is back in positive territory for the year.
Commodities
Oil prices drifted lower over the first half of the week before rebounding as the U.S. dollar sank. Backwardation – in which the spot price trades at a higher price than futures – has steepened to its highest in almost a year, implying strong oil demand. Overall, commodities underperformed last week as natural gas prices came down and industrial metals declined. Gold prices jumped as rates fell.
Economic overview
Consumer prices fell –0.1% m/m in June, well below market expectations, in a report that was widely viewed as friendly to a Fed rate cut opportunity. Excluding food and energy, prices rose 0.1% m/m when 0.2% was expected as relief on rent inflation finally arrived. Owners’ equivalent rent rose a modest 0.3% m/m, and shelter, which includes home energy prices, rose only 0.2%. Finally, core services excluding shelter – known as supercore inflation – fell for the second month in a row. Producer prices rose 0.2% m/m in June, a tad higher than expected, but didn’t ruin the overall tone that inflation has meaningfully decelerated in Q2 after running uncomfortably hot in Q1.
Source: Bureau of Labor Statistics, FS Investments, as of July 12, 2024.