Weekly Recap

The stock market surged higher this week. This was almost entirely due to renewed optimism that the end of the Fed rate hike cycle is within sight. There is finally good reason to suspect that is the case.

The market started rallying on Wednesday, ahead of the Fed policy statement on Thursday. On Monday and Tuesday, the market had gone through its recent typical whipsaw action. Monday the S&P was up 6 points, helped by some merger news and a good earnings report from Walgreen. That didn't last long, however, as the S&P tanked 11 points on Tuesday. This was attributed almost entirely to anxiety over the upcoming Fed policy statement.

On Wednesday, the market put in a late rally that led to 7 point gain for the S&P 500 index. Again, this was due to shifting sentiment about the upcoming Fed meeting. The news that day leaned bearish. The ten-year note yield rose to 5.24%, Nike reported a profit decline, ConAgra missed estimates on their profit report, Wendy's warned of lower than expected profits for this quarter, and Rambus said they might have to restate their financials. The best news was that Wells Fargo announced a dividend increase, stock buyback, and 2-for-1 stock split.

Then the big day finally arrived. The market crept higher on Thursday morning, and then rocketed higher when the Fed policy statement was released.

The statement was bullish because it reflected a far less hawkish tone than feared, and left the impression that the Fed might finally pause in this rate hike cycle, or even soon approach the end of the cycle.

The statement noted a slowdown in economic growth. This was in stark contrast to the previous statement which noted continued strong growth. The statement stated the obvious in that "readings on core inflation have been elevated in recent months" but downplayed that by saying that "inflation expectations remain contained." Perhaps most importantly, the statement also noted that "the moderation in the growth of aggregate demand should help to limit inflation pressures over time."

This suggests that the Fed recognizes a need to wait for the impact of the recent rate hikes to have an impact. This is a much more moderate tone than recent Fed officials have given about the need to act to curtail inflation right away.

The stock market impressively held steady on Friday. The fact that there was no sell-off after the surge on Thursday re-enforces the idea that the move was based on a sound fundamental interpretation of the Fed policy statement. The market is now, once again, looking for just one final rate hike. This time they may have it right.

That will depend, of course, on the incoming data. The economic data this past week supports the conclusion above. On Friday, the May core PCE deflator was reported up 0.2%. This inflation measure is not particularly bullish, but it is not bad news either. The core CPI has been up 0.3% three months in a row. This is the second straight 0.2% for the core PCE. The year-over-year gain was unchanged at 2.1%. The market viewed the number favorably on the belief that stable inflation now is fine if it declines in the second half of the year when economic growth slows.

The other economic reports were mixed. May new home sales rose 4.6% after a large April decline. May existing home sales were off 1.2%. First quarter real GDP was revised slightly higher to a 5.6% annual rate from a previous 5.3%. (That was old news as far as the market was concerned.) New claims for unemployment for the week ended June 24 were little changed. May personal income and spending eased to a very moderate 0.4% in each category. The June Chicago PMI survey of manufacturing conditions dipped to 56.5 from 61.5 in May.

On balance, the data reflects slower economic growth.

The attention now turns to upcoming second quarter earnings reports. The action starts on July 10 with Alcoa. The reporting schedule gets very heavy starting July 17. Forecasts are for aggregate operating earnings for the S&P 500 to be up about 10%. That's a pretty solid gain. The market doesn't typically react to a good earnings season until well into the reports.

Nevertheless, a shift to this positive aspect for the market could well lend support to the improved tone that developed this past week.

-- Briefing.com