Thierry Hasse: Markets see Goldilocks and AI as a winning combination
We are watching stock markets closely today as they react to the tragic events in Pennsylvania over the weekend. At this early juncture, it’s unclear how markets will react over the longer term and it’s still a long way to Election Day in November. We will, of course, continue to stay on top of how geopolitical events shape markets in the U.S. and around the world.
Goldilocks and AI
The “Goldilocks” economy and enthusiasm for the promise of artificial intelligence has been the recipe for the all-time highs being set almost daily on U.S. S&P 500 and NASDAQ stock indexes.
During two days of testimony before Congress last week, Federal Reserve Chairman Jay Powell reiterated the same message: The Fed needs to have greater confidence that the U.S. inflation rate is returning to the 2% goal before the board starts to cut interest rates. This appearance on Capitol Hill offered little in the way of new information but markets seemed to like the mention that keeping interest rates too high for too long could be damaging for the economy. This Federal Reserve Committee wants to lower interest rates, but inflation just needs to cooperate!
Chief Investment Officer Thierry Hasse
Right on cue, last week’s release of the Consumer Price Index by the U.S. Bureau of Labor Statistics showed that headline inflation actually declined by 0.1% for June. It’s the first monthly decline in the inflation rate since the onset of the Covid-19 pandemic in 2020.
The year over year increase for the “core” CPI (which removes volatile food and energy components from the index) decelerated to 3.3%, the slowest reading in more than three years. These excellent economic reports will go a long way to restore confidence amongst Federal Reserve officials that the post-Covid inflation spike is behind us.
The Treasury market, meanwhile, wasted no time sending bond yields lower across the maturity curve by 10 to 11 basis points. The watch for the next Federal Open Markets Committee meeting has started. Expectations are that the July 30-31 meeting will provide the opportunity for the Fed to prepare the markets for the first interest rate cut, which would likely take effect in September.
Looking ahead, the fixed-income market will be focused on the FOMC meeting at the end of the month, while the stock market will be parsing every U.S. corporate earnings release to determine the ability of the stock market to keep climbing.
Meanwhile, the second quarter earnings season started in earnest with the release of financial results for some of the largest U.S. banks on Friday (July 12). In particular the results of JP Morgan caught our attention. The bank earned $18.15 billion for the quarter. That’s more than $200 million net income for every day, including weekends, of the second quarter! (Source: JPM investor relations.) This is but one specific example that the steady climb of the U.S. stock markets is built on solid fundamentals.
This week will bring the steady release of U.S. corporate earnings, notably Goldman Sachs, Bank of America and Netflix.
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