Market snapshot: more interest rate clues to come

US markets largely paused for breath after a heady few days, with the Nasdaq scraping to a fifth consecutive record close and the S&P500 ahead on the week.

The weekly gains are largely explained by hopes of cooling inflation, despite the Federal Reserve’s revised prediction for just one rate cut this year, with the Personal Consumption Expenditures release later this month providing the latest clues on the direction of prices.

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The unconvincing performance of the main indices on Friday was driven in part by a consumer sentiment survey which fell in June from May and was notably lower than estimates.

In what will be a shortened trading week in the US due to the Juneteenth holiday on Wednesday, the consumer will remain in focus with the release of retail sales data tomorrow. Core to the fortunes of economic growth, and with waning sentiment given the higher levels of interest rates, the strength or otherwise of the consumer remains pivotal.

There are concerns that bad debts have started to edge higher in the face of a squeeze on disposable incomes and with the employment market showing signs of weakening. Investors are nonetheless pinning hopes on a 0.4% rebound for retail sales in May following a flat performance in April.

Home sales data is also due this week, although an ominous warning was provided by home furnishings company RH Class A (NYSE:RH) on Friday, who consider this to be the “most challenging housing market in three decades” and whose shares subsequently fell by more than 17%. 

Even so, the main indices have generally continued their march higher in the year to date, with the Dow Jones ahead by 2.4%, the S&P500 by 13.9% and the Nasdaq by 17.8%.

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Asian markets had their own issues to deal with, putting in a mixed performance overnight. Any positive sentiment coming from a reading showing a boost in Chinese consumption was offset by a further decline in house prices, underlining the parlous state of the property sector at present.

In addition, tepid industrial output was accompanied by a decision by the People’s Bank of China not to reduce rates, although there were reports that the door remains ajar despite policy constraints.

UK markets will also have issues to ponder this week, kicking off with a reading on Wednesday which is expected to show core inflation decline further to 3.5%. Even so, with wage growth and service price inflation still uncomfortably high, there seems to be no motivation for the Bank of England to consider cutting rates at its meeting on Thursday.

The previous consensus for an August rate cut is increasingly under pressure, mirroring perhaps the US where just one cut could come towards the end of the year.

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In the meantime, the FTSE100 index opened marginally higher, with some weakness in mining stocks reflecting both a cautious approach to risk as well as concerns over global demand, especially from China, offset by some cautious buying of financial stocks in what has been a bumpy ride of late.

The premier index has now gained 5.5% this year and, while off the highs previously recorded in May, investor sentiment towards what has been an unpopular investment destination seems to be warming by degrees.