Stocks Mixed On Friday, Ends First Half Higher, Employment Report On Deck In Shortened Trading Week Stocks closed mixed on Friday with the big three indexes (Dow, S&P 500 and Nasdaq) closing lower, while the small-cap Russell 2000 and mid-cap S&P 400 closed higher. It was a mixed bag for the week as well, this time with the Dow, S&P 500 and S&P 400 finishing lower, while the Nasdaq and Russell 2000 finished higher. The month was also a mixed bag with the big three indexes in the green, while the other two indexes were in the red. Same goes for the quarter, but only the S&P 500 and Nasdaq in the green, while the rest were in the red. But all of the indexes are up for the first half of the year. There was relief after Friday's Personal Consumption Expenditures (PCE) index confirmed what the previous CPI and PPI reports had shown – that inflation was heading back down. Headline PCE showed no change (0.0%) m/m, which was in line with the consensus, and down from last month's 0.3%. On a y/y basis it was up 2.6%, also in line with the consensus, but down from last month's 2.7%. The core rate (ex-food & energy) was up 0.1% m/m, matching the consensus, but falling from last month's 0.2%. The y/y rate came in at 2.6%, same as the consensus, but lower than last month's 2.8%. While this is unlikely to spur the Fed to cut rates when they meet again at the end of July (7/30-7/31), it will add yet another data point in favor of cutting later this year, as it looks like inflation is back on a path to hit their target of 2%. At the moment, the odds are for a September cut at the earliest, with November or December as the most likely. With the PCE behind us, the focus will shift to Friday's (7/5) Employment Situation report. This is just as important as the inflation numbers. In fact, the stronger than expected labor market has complicated the Fed's task on bringing down inflation. And its strength has suggested that the Fed's rate hike cycle has not had as much of an effect on slowing the economy as they had hoped. Not too long ago, Fed Chair Jerome Powell remarked with seeming incredulity, that rates have risen to 5% while the unemployment rate is still so low. And just a few weeks ago, Federal Reserve Governor Christopher Waller, despite seeing several reports showing that inflation is heading back down, said "in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy." So a slowing labor market from its blistering pace (last month's report showed the amount of new jobs grew 49% more than expected), would be needed in order for the Fed to reach their desired comfort level to lower rates sooner rather than later vs. just seeing progress on inflation alone. We'll have another shortened trading week this week as the markets will be closed on Thursday for the July 4th (Independence Day) holiday. Trading will resume on Friday, but is likely to be lower volume as many will turn it into a 4-day weekend. With all of the indexes in the green for the first half of the year, we'll see if the markets can stretch that into the second half. With a resilient economy, upward trending estimates for corporate sales and earnings, household incomes hovering near record highs, inflation heading back down, and interest rates likely to follow later this year, the odds look good for more gains to come. Then add in the favorable cyclical tendencies with the 4-year Presidential cycle showing that year 4 (that's this year) is the second-best year of all four years (second only to year 3 which was last year when it was up 24%), and the odds look even better. See you tomorrow,  Kevin Matras
Executive Vice President, Zacks Investment Research | 
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