Friday's Market Minute: Cyclical Stocks Broaden Out Market Rally

With both Consumer Price Index and Producer Price Index data rising less than expected in June, equities have traded higher for four consecutive sessions on positive momentum. Lower interest rate expectations on the back of tame inflation readings also put the U.S. dollar index on course for its worst week since the 4th quarter of 2022.

The U.S. dollar index fell 0.8 % yesterday and has fallen nearly 2.5% since last Friday as both two-year and ten-year yields have fallen commensurate with lower price pressures. The June inflation reports came in about as good as investors realistically could have hoped, and equities continue to make new year-to-date highs as coincident economic indicators continue to suggest the economy remains firm.

Broad-based strength across all sectors had eased concerns over the tech-concentrated rally which has led the markets higher since the October 2022 lows. Cyclicals have performed well alongside interest rate-sensitive growth areas of the market, which substantiates the bullish thesis of a resilient economy. 

With that said, the Fed is unlikely to change the expected outcome of an additional twenty-five basis point hike in two weeks as the economy and stock market demonstrate persistent strength. Taking into consideration that the Fed introduced additional liquidity measures during the regional bank crisis earlier this year, liquidity in the financial sector of the economy is still abundant despite the historic increase in rates during the past 15 months.

Despite a hawkish Fed and another interest rate hike due this month, equities continue to climb based on the positive signaling effect established by rates that remain higher for longer. Equity market investors should become concerned when short-duration rates begin to fall rather than being overtly fixated on a Fed that remains firm on monetary tightening.

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