While some indicators have become more bearish in recent months, we remain cautiously optimistic for a soft-landing scenario, especially as the Federal Reserve appears more committed to cutting rates in the coming months.

Last week, stocks gained ground as July’s inflation came in softer than expected, and retail sales exceeded forecasts, easing recession worries. The Consumer Price Index showed annual inflation at 2.9%, with core inflation at 3.2%, both down from June. The Producer Price Index also reflected a sharp drop in producer inflation. Meanwhile, retail sales surged by 1% month-over-month, led by auto-related purchases, fueling hopes for a “Goldilocks” economy. Consumer confidence rose slightly in August, as consumers cited recent changes in perceptions about the upcoming presidential election.

On the other hand, the labor market is showing signs of softening, with the highest level of insured unemployed persons since November 2021. Despite this, some metrics like the Employment Trends Index suggest this softening represents a normalization of the labor market rather than moving towards a full-blown recession. Q2 earnings have been largely positive, with most sectors surpassing expectations, though recession indicators remain mixed, keeping our market view cautious.

Stocks saw a sell-off last week due to intensified recession concerns following a weak July employment report and other bearish indicators, coupled with the absence of a definitive timeline for rate cuts from the Federal Reserve. The July Fed meeting left policy unchanged but hinted at a potential rate cut in September, with the market now pricing in a 79.5% chance of 50 basis points of cuts.

Another bullish week went down for stocks and bonds, as June’s CPI fell to -0.1% monthly and 3% annually, the lowest since June 2023. Core CPI dropped to 3.3%, a low since 2021. On the other hand, the Producer Price Index posted hotter than expected data, however this was largely overlooked by markets.

In Q2, both our economic cycle and tactical market cycle assessments remained positive, but less bullish than at the start of the quarter. This shift indicates emerging concerns in economic data, suggesting the US economy might be at a transitional point between downturn and recovery.

This week echoed the likelihood of a soft landing as June’s jobs report showed mixed results with nonfarm payroll rising, but an unexpected increase in the unemployment rate, hinting at a higher chance of Federal Reserve rate cuts in September. Both the ISM Manufacturing and Services Indexes indicated sector-wide weaknesses in June, suggesting an increased risk of an economic slowdown. Monitoring economic and inflationary data, especially the CPI print and the start of Q2 earnings in the week ahead, will be crucial.

Despite being more muted last week, stocks posted a positive first half of 2024. In this past week’s economic news, PCE inflation remained flat at 2.6%, personal income rose 0.5% in May, and consumer spending grew 0.2%. Consumer confidence fell slightly, with concerns about future economic conditions.