Russell 2000 ahead in lackluster market

Few assets were in the green this morning, with defensive stocks in the broadly based Russell 2000 ahead. Otherwise, Wall Street lacks direction ahead of this week's consumer and producer price inflation data, anticipated weak second quarter earnings reports, and a sluggish Chinese economy. Key data later this week include core CPI and core PPI for June, expected to fall back to 5.0% (5.3% last month) and 2.8% (2.8% prior), well above the Fed’s target range, and likely to set the tone for the interest rate outlook.

Bottom-line: risk-off.

TODAY’S MAJOR NEWS

Bleak Q2 earnings season expected

Forecast second-quarter earnings are expected to make a bleak start this week, with all eyes on Banks and Tech stocks looking to justify recent price performance. Consensus estimates for S&P 500 companies project a 7% decline in earnings per share in Q2, the steepest decline since 2020. Consumer discretionary, utility and communications services are the only sectors expected to see higher second-quarter earnings.

Soft-landing redux, with stubborn inflation

Debating an economic soft-landing is again popular. The latest jobs report that showed a tightening labor market, an improving housing market amid a shortage in supply, and a rise in consumer sentiment. While we are seeing early signs of the Fed’s monetary tightening slowing the economy, it might not yet have done enough. Fed members want to give their policy time to work, but they also do not want to give inflation a tighter grip on the economy by being too slow to respond.

An overwhelming majority of consumer home loans are less than five years old at very low interest rates. That gives them some staying power, and immunity to rate rises, while keeping the supply of housing very tight as new buyers continually come on to the market. Consumer sentiment is rising as job loss fears are declining and wages are going up. This suggests that core inflation, expected to remain above 5% this week, is still well above the Fed’s 2% mandate. Inflation might not be transitory.

China entering deflation?

China could be sliding into the type of deflationary cycle which hamstrung the Japanese economy for a decade. China’s CPI fell 0.2% month-on-month in June, and was flat year-on-year. China’s core CPI that excludes the more volatile food and energy sectors declined 0.1% month-on-month, and was up 0.4% year-on-year. Today’s data raises warning flags for the Chinese economy. Of particular interest, clothing prices – a measure of consumer sentiment – fell 0.2% month-on-month in June. Transportation and household goods and services prices fell 0.5% month-on-month in June.

Ukraine grain initiative ending?

With just one week left in the current Ukraine grain initiative, Russia doesn’t even appear interested in talking about another extension. Look for Ukraine to shift to its “Plan B” at some point soon and to continue to ship absent a deal, but it’s yet to be seen whether shippers will be willing to take the risk or not, and if so, at what pace. The primary question then will be, how will Russia respond? And what will further restrictions in grain exports mean for commodity prices?

TODAY’S MAJOR MARKETS

Equity markets

• Markets trod water this morning, with the Russell 2000 up 1.4% while the Nasdaq and the S&P 500 were flat
• Global markets were mixed, with the DAX and FTSE 100 up 0.5% and 0.2% respectively, and the Nikkei 225 off 0.6%
• The VIX, Wall Street’s fear index, rose to 15.2

Currencies and Bonds

• The dollar index fell 0.3% against a basket of currencies to 102.0
• Euro/dollar rose 0.3%, while Sterling/dollar was unchanged
• Bonds rallied, with yields on 2- and 10-year Treasuries falling to 4.85% and 3.99% respectively

Commodities

• Gold prices were unchanged at $1,930 per ounce
• Crude oil prices fell 0.2% to $73.7 per barrel
• Grain and oilseed markets rallied ahead of Wednesday's USDA WASDE crop report

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com