The markets finished mixed last week. The S&P 500 and small-caps were little changed, but cyclicals and defensive sectors, including utilities, were all up. This is part of the problem when you have just a handful of stocks controlling the major indices. When NVIDIA falls 8% like it did last week, the major averages are going to struggle, even though the majority of market sectors are posting gains.
Risk-on/risk-off sentiment looks fairly balanced here in the short-term, but we did get some important data that would support the soft landing/reflationary theme. Q2 GDP was revised up from 2.8% to 3.0%, demonstrating that economic growth and consumer spending remain resilient in the face of multiple credit-related warning signs. PCE inflation, the Fed’s preferred measure, gained 0.2% as expected, while U.S. personal spending rose another 0.5%, also in line with expectations. The controlled pace of inflation will help clear the way for rate cuts later this year, but a 3% GDP growth rate could prevent the Fed from moving too far, too fast. It’s good that inflation has returned to a more normalized level, but the core rate is still above 3% and has proven sticky throughout this cycle. While the lagged effect of monetary policy changes won’t have an immediate impact on economic conditions, a 3% GDP growth rate and 3.2% core inflation rate aren’t necessarily the ideal combination for cutting rates by 100 basis points in the next four months.
