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Reports showing moderating inflation kept equity markets near their highs last week. For the week, the S&P 500 Index was +0.4%, the Dow Jones Industrials -0.5%, and the NASDAQ +1.1%. The Energy, Utility, and Consumer Staples sectors led the S&P 500 Index for the week, while the Consumer Discretionary, Communications Services, and Materials sectors lagged. The 10-year U.S. Treasury note yield was 4.688% at Friday’s close versus 4.641% the previous week.
July inflation reports showed inflation at or slightly less inflationary than expectations. The July Consumer Price Index (CPI) was +0.1% month-over-month and core CPI, which excludes changes in food and energy prices, was +0.2% month-over-month, both in-line with expectations. On a year-over-year comparison, CPI was +3.4% and core CPI was +2.5%. The July Producer Price Index (PPI) was flat month-over-month and core PPI, which excludes changes in food, energy, and trade, was +0.4%. This was slightly less inflationary than expected. The year-over-year change in PPI was +4.7% and core PPI was also +4.7%. CME Fed funds futures now show a single 0.25% increase at the December Federal Open Market Committee meeting versus a projected change at the October meeting.
Several major retailers are scheduled to report earnings this week. Overall, twelve companies in the S&P 500 Index are scheduled to report. With over 90% of companies already reported, 85% of those companies have exceeded consensus estimates, which is above the 76% historical average. Second quarter earnings are expected to grow by 50.4% and quarterly revenue growth is expected at 15.0%. Full-year 2026 earnings are expected to grow by 30.0% with revenue growth of 11.5%.
In our Dissecting Headlines section, we look at inflation, deflation, and disinflation.
Financial Market Update
Dissecting Headlines: Inflation, Deflation, and Disinflation
At the June Federal Open Market Committee meeting, the last sentence of the official statement read, “The Committee will deliver price stability.” An acceptable level of price stability is a 2% annual rate of inflation across an economic cycle. The extreme levels of inflation seen during 2022 were disruptive to price stability, so the Fed enacted a more restrictive monetary policy by raising short-term interest rates. The objective was to slow the rate of inflation by reducing demand for goods and services by making the cost of borrowing money more expensive. The Fed then gradually lowered interest rates as inflation abated.
By slowing the rate of inflation, the Fed was striving for disinflation. A disinflationary economy can still experience growth, but in an environment of better price stability. The economy, in aggregate, typically exhibits disinflation rather than deflation. Deflation is a drop in the price of goods and services. Widespread deflation would likely indicate an economy in a severe contraction. More often, individual products and services experience deflation in prices rather than the economy as a whole. We often see this in volatile commodities, such as food and energy prices. This is why price changes in those categories are often separated from the rate of core inflation. We also see deflation in products or service experiencing substitution or obsolescence. Prices can also fall for a product as it reaches greater consumer penetration and mass production has allowed it to be produced cheaper.
The Fed is trying to create a disinflationary environment, rather than deflationary, to get to its 2% goal. This allows for economic growth, job creation, and an acceptable level of price stability.
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