Last week the stars aligned on several fronts allowing, once again, the S&P 500 and Nasdaq stock indexes to close at all-time highs accumulating year-to-date returns of +16.7% and 22.3%, respectively led not only by Apple and Microsoft but also those related to the consumer sector such as Procter & Gamble and Walmart. 

For now, the Dow only accumulates +4.5% anchored by the health sector. Meanwhile, the 10-year sovereign rate eased to 4.28% (-13 basis points) as a result of the employment data released last Friday, attesting to a decompression on the wage front.

Among the factors that influenced stock market performance were: 

1. PCE inflation data continued to ease in the direction of 2%.

2. The Federal Reserve (FED) Chairman, Jerome Powell, verbally intervened arguing that the inflationary scenario had resumed the expected direction, thus opening the possibility of a potential lowering of the monetary policy rate (currently at 5.5%). 

3. The unemployment rate rose to 4.1% and wage inflation eased to 3.9% (its lowest level since June 2021). 

4. The appetite for tech continues to be insatiable leading to, for example, Tesla renting almost +20% on the week after Q2 sales beat market expectations.

5. For better or worse, in the U.S. political environment, pressure from the media, associated with the Democratic Party, for President Biden to resign from the presidential nomination, increased considerably with the president becoming increasingly isolated as a result of his cognitive ability. As the days go by, the polls are giving the clear winner to former President Trump, with the Democratic Party increasingly worried about losing Congress due to Biden's delicate health situation.

This week we will start with two speeches by Powell in front of Congress shedding light on the monetary policy report released last Friday, where he will likely outline the possible interest rate cut between tomorrow and Wednesday if inflation continues its trajectory towards 2% and the unemployment rate climbs to 4.2%. On Thursday, last month's inflation data will be released with headline inflation easing to 3.1% (from 3.3%) and core inflation, which excludes food and energy prices, remaining at 3.4% (unchanged). On Friday, we will be waiting for the start of the second quarter corporate earnings season with the release of BNY Mellon, Citigroup, JP Morgan Chase and Wells Fargo among other companies. For now, according to Factset, it is estimated that S&P 500 companies' sales will expand +4.6% and profits will expand +8.8% compared to the same quarter of the previous year. There are those who believe that the market has gotten ahead of itself during the first half of the year, not only with the possible lowering of interest rates by the FED, but also that corporate fundamentals are not supporting the price-earnings ratio reached by the S&P 500 of 21.2 times, far exceeding the average of the last decade of 17.9 times.  

On the macroeconomic front, we started July with PCE inflation data easing to 2.6% (from 2.7%) and core to 2.6% (from 2.8%). This allowed Powell, from an event in Portugal last July 2, to argue the following: 

We just want to understand that the levels we are seeing are a true reading of what is really happening with core inflation ... I think the latest reading and the previous one suggest to a lesser extent that we are getting back on the disinflationary path. [However], we want to be more confident that inflation is moving sustainably toward 2% ... [before] we start easing policy.

This was followed by employment data that showed the unemployment rate rising to 4.1% (from 4%), monthly job creation of 206,000 new jobs in line with market expectations, and wage inflation easing to its lowest level since mid-2021. This last figure is the one that will have to be decompressed for inflation to finally ease towards 2%. Having noted that in the macroeconomic report that Powell will present to Congress between tomorrow and Wednesday there was an extensive analysis of the inflationary impact of the price of real estate rents (the prices of housing services) arguing that this was an inflationary problem that was still too high. For some reason the Fed chose to overemphasize the latter concept throughout the paper which will be central to Powell's presentation in the coming days. 

On the corporate front, Boeing is expected to plead guilty to fraud in the accidents involving its Max 737 aircraft. Meanwhile, Paramount agreed to merge with Skydance, valuing the merged company at US$28 billion and the Danish company Carlsberg announced the acquisition of the British company Britvic for US$4.2 billion.

On the political front, in the United Kingdom, Keir Stammer of the Labor Party was sworn in last week as the new Prime Minister, facing a growing fiscal deficit. In France, the left succeeded in stopping the extreme right in the second round of elections, generating a fractured parliament where coalitions will now be forged in an effort to form a new government. Finally, in the United States, President Biden, in a televised interview last Friday, invoked that he will only leave the presidential race under the following condition: 

If the Lord Almighty came down and said, 'Joe, get out of the race,' I would get out of the race. The Lord Almighty is not going to come down.

That comment, after the stumbling interview, led some Democratic party leaders to formally ask him to withdraw from the race while the right wing remains expectant (and silent) on the political outcome. For now, there is time until the August 19 Democratic convention to nominate a new presidential candidate.   

In conclusion, regardless of the confusing US political scenario, there are lower inflationary pressures that would allow a potential lowering of the monetary policy rate in the fourth quarter of the year (so as not to interfere in the presidential race) which, together with good corporate results, could justify the market appreciation. 

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