Market Insights

Money is flowing back into stocks as investors hope for a better inflation report this week.

The S&P 500 rose 1.9 percent between Friday, May 3, and Friday, May 10. It was the third straight positive week. More than four-fifths of the index’s members advanced, including all the major sectors.

No single event triggered the gains. Instead, there was a sense of spreading calm after Federal Reserve officials like John Williams and Thomas Barkin said interest rates are likely headed lower over time. Attention will continue to focus on monetary policy this week with the consumer price index (CPI) due on Wednesday morning.

Morgan Stanley predicted that inflation will slow thanks to easing costs for rent, health care and auto insurance. The bank expects steady improvement later in the year, allowing the Federal Reserve to cut interest rates in September. Jim Paulsen, former chief investment strategist at Wells Capital Management, separately wrote that lower commodity prices will also lower inflation.

“I think inflation’s going to cool pretty dramatically,” Tom Lee of Fundstrat told CNBC last Monday. “I don’t know when, but it will be be sometime in the second half of this year.”

Jobless claims also jumped to 231,000. It was the highest reading since August and 21,000 more than forecasts. Combined with April’s weak employment report, that also spurred hopes of lower interest rates.

Utilities and AI

Utilities rose the most last week and are now vying with communications as the leading sector this year. The group is benefiting from positive regulatory decisions in California and hopes of lower interest rates. Perhaps more interesting was an observation by Bespoke Investment that Artificial Intelligence (AI) is boosting demand for electricity.

Financials were the second-best performer as banks, life insurers and asset managers pushed higher. Companies associated with traditional Wall Street activities, including Goldman Sachs (GS), Morgan Stanley (MS), Citi (C) and Moody’s (MCO) also rose.

“There will be, I think, a lot of IPOs done this summer,” John Waldron, the chief operating officer of GS said on Thursday. “People are seeing that momentum building.”

Gold and silver miners bounced on optimism about lower interest rates. Chipmakers also rallied after Taiwan Semiconductor (TSM) reported April sales increased by 60 percent from a year earlier.

Mettler-Toledo (MTD) led the S&P 500 with a 21 percent gain last week. (It was also the stock’s best week since April 2009.) The maker of precision measuring equipment had strong margins, letting profit beat estimates by 16 percent despite revenue beating just 5 percent. Management partially attributed the results to Chinese demand.

Gen Digital (GEN), formerly known as NortonLifeLock, and electric utility Vistra (VST) also rallied.

Airbnb (ABNB) and Akamai Technologies (AKAM) were some of the big decliners following results. ABNB issued weak guidance as North American bookings slowed. AKAM said its delivery business was hurt by a big customer looking to in-house content delivery.

Tesla (TSLA) also fell on worries about its Autopilot service and more job cuts.

Charting the Market

The S&P 500 ended last week at its highest level since April 1, while the Advance/Decline Line hit a new record. TradeStation data also showed 56 members of the S&P 500 hitting new 52-week highs — the most since March 28. Some chart watchers may consider those points as confirmation of the market’s recent gains.

The index has returned above its 50-day moving average, a potential sign of intermediate-term strength.

Other charts may support a bullish trend in equities:

• Treasury yields didn’t bounce and completed a second week below their April 25 high. Staying here could make investors think yields are done rising after two years of steady gains.
• The U.S. dollar index remained below its October peak. Weakness in the greenback is typically associated with lower interest rates and risk appetite.
• Cboe’s volatility index (VIX) ended last week at its lowest level since December.

The Week Ahead

This week’s main events are likely to be tomorrow and Wednesday.

Today features speeches by Fed officials Loretta Mester and Philip Jefferson.

Tomorrow brings the producer price index (PPI) and an appearance by Fed Chair Jerome Powell at 10 a.m. ET. Home Depot (HD) also reports earnings.

The April CPI inflation report at 8:30 a.m. ET on Wednesday will likely be the main event of the week. Economists, on average, expect prices to rise by 0.3 percent from March. In addition to the headline and core numbers, investors are likely to focus on category details. They could be especially optimistic if shelter slows because it accounts for more than one-third of the overall index.

Crude-oil inventories are also due and Cisco Systems (CSCO) issues quarterly results.

Thursday features housing starts, building permits and initial jobless claims. Raphael Bostic and Michael Barr of the Fed also speak. Walmart (WMT), Baidu (BIDU) and Applied Materials (AMAT) report earnings.

Chris Waller of the Fed speaks on Friday.

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