Equity markets started the week on uncertain footing, hugging break even most of the day and closing the session with a small loss. Friday's labor market report confirmed that the US economic condition is still good and that consumers are working and earning more than ever. The bad news is that resilient labor market conditions and broad economic health do not indicate a need to cut interest rates, which raises a question of when the first cuts will come. The CME FedWatch Tool reveals diminishing hope for a summer cut and growing concern there will be no FOMC interest rate cuts this year.
The risk for this week is inflation. The market will get a triple-dose of inflation data, including the Import Price, Producer Price, and Consumer Price Indices. The indices are expected to show persistently high inflation across the board, which may lead the market to reduce its already diminished outlook for FOMC action. The takeaway is that the market expects an economic shift in the back half of the year that is slowing being priced out of equities. Whether or not the S&P 500 can continue to rally depends on the economy and the consumer.
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