Key Takeaways:
- A hotter-than-expected U.S. inflation report, alongside rising concerns of an Iranian retaliatory strike on Israel, sparked a bout of market indigestion last week. Stocks moved lower, while interest rates and gold prices moved higher.
- We think inflation will continue to trend lower, but recent U.S. data reveal the pace of improvement has stalled. We don’t believe this eliminates the prospects of rate cuts later this year, but it does complicate the picture for the Federal Reserve in the coming months. It’s likely the Fed will have to cut rates less than previously anticipated as it waits for further confirmation that inflation is under control.
- Stocks have pulled back in recent days but remain only slightly below all-time highs. We think some temporary weakness is reasonable given the strength of the recent rally and the adjustments to policy expectations. That said, markets have handled this news fairly well, which we think reflects the still-favourable outlook for economic and corporate earnings growth.
Last week’s solar eclipse captured a ton of eyeballs (literally), which is logical considering the rarity of the event. But there was another seemingly rare event last week: The stock market turned lower.
For those of you who prefer your markets to move in a straight line higher, you may not want to stare directly at the chart below. If you do, and if you squint hard enough, you’ll notice what appears to be a kink and a downward slope at the right end of the line, as hotter-than-expected U.S. inflation data eclipse the enthusiasm around upcoming Fed rate cuts.
This raises the questions: What’s up with consumer prices? And does this latest inflation data set a new, dimmer course for stock prices ahead? We’ve held the view that this rally will eventually need to blink, but broadly, we think there’s still a good case for investors to look up.
Stocks stumble after a steady march higher
