S&P 500 Could See Some Added Volatility Today With Trading Growing Thin

Stock indexes could see some added volatility today with trading growing thin ahead of the weekend, which could be a long one for many traders. Markets are closed on Tuesday, July 4 for Independence Day, so a lot of folks will be taking a four-day-weekend.

Inflation

Today also marks the end of the month, end-of-quarter, and end of first half of the year, so there may still be some big money shifting around. Adding to that is the critical PCE Prices Index due out this morning. The headline rate is expected to slow to 3.8% for May versus +4.4% in April. The “core” rate – one of the Fed’s preferred gauges that strips out food and energy – is expected to remain flat at +4.7%.

The main areas of stubborn elevation have been shelter prices, food, and services. Interestingly, stripping out shelter brings the May “core” rate all the way down to +3.4%.

Economists still expect the ongoing rent deflation will start showing up sometime in the second half of the year, as well as a moderate softening of home prices. Those declines won’t be enough however to slow inflation down to the Fed’s +2% target rate, at least not in 2023.

Data to Watch

A bigger worry for investors as far as economic data is next week’s June Employment Report, due out on Friday, July 7. The Federal Reserve has made it pretty clear that it doubts inflation can be beat with the strong labor market. After the surprising strength of hiring in May, investors are very nervous about a repeat for June. It is worth noting that the unemployment rate ticked up by +3 points in May despite the addition of +339,000 jobs.

A big portion of that seems to stem from “self-employed” workers, particularly gig workers (Uber drivers, etc.), moving back into the regular job market. Many Wall Street insiders think the Fed wants to see the unemployment rate push above +4% before it feels comfortable ending this rate hiking cycle.

A recession would certainly accomplish that and then some, although Wall Street economists are divided as to whether the long-predicted downturn will happen at all.

There are also deep divisions as to when it might happen with a lot of economists now pushing recession out into the first part of 2024, as opposed to the second half of this year.

Those that think the US will escape recession point to not only the strong job market but also the housing market.

Keep in mind, home prices don’t always fall during recessions and the labor market doesn’t typically start to slide until the economy has already turned.

Next week’s other economic data includes ISM Manufacturing and Construction Spending on Monday; ADP’s Employment Change and Factory Orders on Wednesday; and the ISM Non-Manufacturing Index and the Job Openings and Labor Turnover Survey on Thursday.

Earnings are extremely light next week with Levi Strauss on Thursday really the only notable US release.

Overall, not a lot has changed this week. Wall Street bears are pointing toward a still hawkish Fed and an inverted yield curve, which historically signals a recession is around the corner.

Bulls are saying US employment is strong enough to pull us through it without much turbulence and that corporate earnings expectations are low enough to keep the stock market from melting down. Perhaps the market chops around until it finds the next major catalyst.