S&P 500; US Indexes Fundamental Daily Forecast – Bank Earnings, Consumer Inflation Will Set the Tone for the Day

U.S. equity markets performed well on Thursday on light volume, led by a surprising strong performance in the retail stock sector and another record close by the Dow Jones Industrial Average.

Investors continued to keep their eyes on Federal Reserve Chair Janet Yellen who completed her last day of testimony before the Senate Banking Committee. Her dovish remarks from Wednesday sparked a rally in the U.S. stock market. Traders also prepared for the release of the latest U.S. figures on consumer inflation and the start of earnings season.

In the cash market, the benchmark S&P 500 Index settled at 2447.83, up 4.58 or +0.19%, the blue chip Dow Jones Industrial Average closed at 21553.09, up 20.95 or +0.10% and the tech-based NASDAQ Composite ended the session at 6273.91, up 12.64 or +0.20%.

Underpinning the Dow and S&P 500 Index on Thursday was a strong performance in the retail sector, mostly led by a 4.8 percent gain in shares of Target stock. The SPDR S&P Retail exchange-traded fund (XRT) jumped 2.3 percent and posted its best trading day of the year.

Fed Chair Yellen continued her testimony in Washington on Thursday for a second day. She commented on numerous topics on Thursday, ranging from monetary policy to banking regulation to President Trump’s agenda. However, her remarks didn’t have the same impact on the financial markets as they did on Wednesday when she revealed her concerns over muted inflation and its possible impact on future interest rate hikes and monetary policy.

In prepared remarks released on Wednesday, Yellen gave no clear indication about the future course of interest rate hikes but did say the Fed is likely to begin unwinding its $4.5 trillion bond portfolio later this year.

Among the various topics discussed on Thursday, Yellen added, uncertainty surrounding Trump’s policy agenda is “quite high” and that 3% GDP growth in the next 2 years would be difficult. She also added that she believes opioid abuse could be holding back the U.S. economy. Yellen also said that changes to the U.S. health-care system is one factor causing uncertainty in the economic outlook.

Forecast

With Yellen’s testimony history, investors have now shifted their focus to Friday’s U.S. consumer inflation report and the start of earnings season with the release of second quarter results from several major banks.

Yellen’s comments on concerns about low inflation on Wednesday make the U.S. CPI report extremely important to Fed watchers and the financial markets.

The CPI report, due to be released at 1230 GMT, is expected to come in at 0.1%, up from the previous -0.1%. Core CPI is forecast to show a 0.2% rise, up from 0.1%.

Stocks could erase the gains attributed to Yellen’s dovish comments if the CPI comes out well above the forecast. The rally could extend even further if the number comes out as expected or lower.

Traders will also have the opportunity to react to the latest report on retail sales. Retail Sales are expected to rise 0.1%, up from -0.3% and Core Retail Sales are estimated at 0.2%, up from 0.1%.

Three big banks, JPMorgan Chase, Citigroup and Wells Fargo could set the tone of the market early when they report second-quarter earnings ahead of the CPI report and the opening bell of the stock market.

Traders should look for increased volatility on Friday especially during the pre-market session since the earnings report and the CPI report will be released before the cash market opening.