S&P 500 Rallies on Positive Inflation Data, Economic Resilience
The S&P 500 has risen for a fifth consecutive day, buoyed by encouraging inflation news that strengthens the likelihood of a Federal Reserve rate cut in September. The latest Consumer Price Index (CPI) data shows a modest 0.2% increase for July, pushing the annualized rate below 3% for the first time since 2021. This marks significant progress from the 9.1% peak in June 2022, underscoring the steady disinflation trend that began last year.
Shelter inflation, a major contributor to CPI, rose by 0.4% in July, accounting for nearly 90% of the monthly increase. However, this figure is likely overstated due to the backward-looking nature of the CPI’s calculation method, which includes all leases rather than just new ones. Real-time data from the Apartment List Rent Index, which reports outright deflation in shelter costs, suggests that the true inflation rate may already be closer to the Federal Reserve’s 2% target.
The Federal Reserve’s focus on the Personal Consumption Expenditures (PCE) price index, which gives less weight to shelter, shows that core inflation is already down to 2.6%. This aligns with the Cleveland Fed’s revised estimates for July’s monthly increase, which they now project at just 0.1%. These developments bode well for a potential soft landing, as inflation continues to ease while the economy maintains steady growth.
Further signs of economic resilience emerged from the latest retail sales report, which ended fears of an impending recession. Despite a weaker-than-expected jobs report for July that briefly rattled markets, retail sales rose by 1% in July, surpassing expectations. The surge in sales, particularly in the auto sector, was a significant factor in the S&P 500’s recent 6% rally over the past six days.
Walmart’s strong second-quarter earnings report provided additional evidence of consumer strength. The retail giant exceeded expectations and raised its guidance for the fiscal year, with same-store sales rising 4.2% and online revenue soaring by 22%. These results reflect a broader trend of consumers shifting their spending towards services in the post-pandemic economy, helping to sustain economic growth.
Real earnings growth continues to support consumer spending, a critical factor in the ongoing economic expansion. Production and non-supervisory workers saw a 3.5% increase in average weekly earnings, outpacing the 2.9% rise in the cost of living. This positive trend in real income is essential for maintaining the momentum of consumer spending, which in turn supports overall economic growth.
In conclusion, the combination of disinflation, steady growth, and resilient consumer spending points to a successful soft landing for the U.S. economy. As the Federal Reserve prepares for its September meeting, the prospect of a rate cut appears increasingly likely, reinforcing investor confidence and fueling the ongoing bull market.
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