US stocks hit new highs on inflation data boost, focus this week on retail sales and employment market trends

According to the Zhitong Finance and Economics APP, the S&P 500 and NASDAQ Composite Index rose last week thanks to weaker-than-expected inflation data boosting investors' optimism about a Fed rate cut. The S&P 500 rose nearly 1.6% and closed above 5400 points last week, while the NASDAQ Composite Index rose over 3%. Both indices closed at historic highs for four consecutive days last week. However, the Dow Jones Industrial Average fell 0.5% last week.

Investors will face a relatively calm week ahead. The most important data will be the US May retail sales data to be released on Tuesday night Beijing time, as well as the latest data on manufacturing and services PMI and initial jobless claims. Additionally, the US stock market will be closed on Wednesday for the June holiday.

1. Inflation Falling in the Right Direction

US May CPI data showed that the core CPI, which excludes volatile food and energy categories, rose 0.2% month-on-month, the lowest level since June 2023. Meanwhile, the core PPI for May remained flat, below economists' expectations of a 0.3% increase.

Economists believe that these data indicate that the US May core PCE data to be released later this month will also show weakness, which is a preferred inflation indicator for the Fed.

Stephen Juneau, a US economist at Bank of America, said that disinflation is the most likely path forward. The bank expects the US May core PCE to grow by 0.16% month-on-month. Juneau stated, "The May CPI and PPI data are favorable to our view that the Fed will cut rates later this year. We believe the recent data significantly reduces the likelihood of the Fed having to raise rates. In addition, labor market data suggest that the likelihood of a rapid rate cut is also low." He added, "A loose cycle starting in September is still possible, especially if housing inflation slows further in the coming months."

2. Signs of Weakness in the US Economy, Economists Worry about Fed Overcaution

Inflation is falling, economic growth is slowing, but the Fed is expected to cut rates only once this year. More and more Wall Street economists are worried that the Fed may be too cautious in its most stringent monetary policy in over 20 years. Economists are concerned that signs of weakness in the US economy have emerged—such as rising unemployment—and if the Fed keeps rates high for too long, this situation could deteriorate rapidly. This is why investors will closely watch the initial jobless claims to be released on Thursday. The latest data released last week showed that initial jobless claims in the US rose to 242,000 people in the week ending June 8, hitting a 10-month high Chief Economic Advisor Mohamed El-Erian of Allianz stated that if the Federal Reserve waits until December to cut interest rates, the risk balance tends to be "too late." Neil Dutta, Chief Economist at Renaissance Macro, said in a report that there are sufficient reasons to believe that further deflation is still ongoing, which will require the Fed to change its language. Neil Dutta stated that the risk lies in the Fed not changing its current stance.

3. US Retail Sales Data for May

The US retail sales data for May, to be released on Tuesday, will be a key indicator of consumer performance in a high-interest rate environment. Economists expect US retail sales to increase by 0.3% month-on-month in May, rebounding from a 0% month-on-month increase in April.

The economic team at Wells Fargo Bank, led by Jay Bryson, stated in a report to clients: "We suspect that consumer spending will grow at a more moderate pace in the second half of this year. The personal savings rate has declined; consumer credit has slowed due to rising delinquency rates; and real disposable income growth has weakened due to a slowing labor market." They added: "These increasingly adverse factors may put pressure on discretionary spending, which could restrain retail sales growth in the coming months."

4. Will the US Stock Market See Another Bull Market?

After a challenging start in 2024, the latest inflation data is likely to add momentum to the current stock market rebound. Julian Emanuel, Head of Stock, Derivative, and Quantitative Strategy at Evercore ISI, stated: "Declining inflation remains one of the key factors behind the US stock market bull market."

Both the S&P 500 Index and the NASDAQ Composite Index set new closing highs for four consecutive trading days last week as investors digested weaker-than-expected CPI and PPI data. Despite the Fed's latest economic forecast summary last week showing a median forecast of only one rate cut this year, the market remains optimistic about two rate cuts this year.

Jonathan Golub, Chief US Equity Strategist at UBS Investment Bank, stated that last week's inflation data and what it may imply for eventual rate cuts "provide greater upside potential" for his year-end outlook. His year-end target for the S&P 500 Index is 5600 points, one of the highest targets on Wall Street.