U.S. stocks are on pace for their strongest weekly gain in two months as investors bet on a pause in the Fed’s rate hike strategy later this year.
U.S. equity futures extended gains Friday, putting stocks on pace for their best weekly gain in two months, as investors bet that the Federal Reserve’s suggestion of an autumn pause in rate hikes, paired with what could be a peak in inflation readings, will lift markets from one of their worst starts to the year since the 1930s.
Solid retail earnings have also indicated that consumers aren’t ready to roll over amid the fastest inflation in forty years, adding to optimism that the underlying economy remains firm and the Fed will be able to engineer the ‘soft landing’ it desires from higher interest rates that tame inflation pressures.
An important piece of that task will arrive this morning, with an 8:30 am Eastern time reading of the Fed’s preferred inflation gauge, the core PCE Price Index, which is expected to ease modestly from its multi-decade highs.
A softer reading could add to bets that the Fed is prepared to pause rate hikes in the fall, following 50 basis point increases that are largely price-in for its June and July meetings, and confirm some analysts’ assessments that domestic inflation has peaked.
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“The overall economy is still underpinned by a very strong labor market and while challenges to margins have emerged for some big-box retailers, there are other signals in the economy that show consumers still have the ability to spend,” said Charlie Ripley, Senior Investment Strategist for Allianz Investment Management in Minneapolis. “Overall, markets were hovering near oversold territory and (Thursday’s) rally was a result of walking back some of the recent recession fears,” he added.
Bank of America’s Flow Show suggests others are spotting the trend: nearly $22 billion has poured into U.S. equity funds this week, the most in more than 10 weeks, while the U.S. dollar index, a good gauge of global risk appetite, fell to a one month low of 101.684 in overnight trading. Benchmark 10-year Treasury bond yields — which move inversely to prices — slipped 3 basis points to 2.725% in early New York trading.
In overseas markets, European stocks added to yesterday’s gain by rising 0.85% in mid-day Frankfurt trading while the region-wide MSCI ex-Japan index jumped 2.09% in a follow-on rally from last night’s close on Wall Street.
Heading into the final trading day before the Memorial Day long weekend, futures tied to the Dow Jones Industrial Average indicating a 25 point opening bell gain while those linked the S&P 500 were priced for a 9 point bump. Futures linked to the tech-focused Nasdaq, which id down 25.85% for the year, are looking at 45 point opening bell advance.
Gap Inc (GPS) – Get Gap, Inc. Report shares were the most active name in pre-market trading, falling around 20%, after the casual clothing retailer posted a wider-than-expected first quarter loss while slashing its full-year profit forecast.
Costco Wholesale (COST) – Get Costco Wholesale Corporation Report shares were also lower, after the big-box discount retailer posted weaker-than-expected same-store sales despite luring more members to its club with cheaper gasoline.
Staying in retail, Big Lots (BIG) – Get Big Lots, Inc. Report shares plunged 22% after it posted a surprise first quarter loss amid what it called “significant” cost and margin pressures brought by the fastest U.S. inflation in more than forty years.
On the other side of the ledger, Dell Technologies (DELL) – Get Dell Technologies Inc Class C Report shares surged 14% after the PC and laptop maker posted stronger-than-expected first quarter earnings and boosted its near-term profit outlook.
Chipmaker Marvell Technology (MRVL) – Get Marvell Technology, Inc. Report, meanwhile, rose 5.5% trading after it posted better-than-expected first quarter earnings and a robust outlook for data center semiconductor demand.