Friday's Market Minute: Is the Market Rally Running Out of Steam?

Investors have scrutinized economic data releases in recent weeks for clues about how aggressively the Fed will raise borrowing costs to tackle rapid price growth. Minutes from the most recent FOMC meeting show the U.S. central bank saw little sign of inflation improving and Fed officials signaled restrictive rates may be needed for some time.

Overall, U.S. stocks traded mixed this week as investors grappled with relatively strong U.S. economic data that might keep the door open for aggressive Fed tightening for the rest of the year. Initial jobless claims dipped, easing concerns that the labor market was starting to head in the wrong direction.

Since mid-June, equities have retraced a little over half of this year's decline. This has led bulls to all but declare victory as the S&P is nearing five consecutive weeks in the green. However, stocks may struggle for direction for the rest of the summer as it is still uncertain how aggressive the Fed will be in September.

Contingent on a 50-basis point hike, the 10 year-3 month yield curve is likely to become closer to inversion in September as the gap continues to narrow with every hike in the Fed Funds rate. Interestingly, the stock market and the bond market are in increasing disagreement over the path of the economy. Stocks have rallied sharply, indicating investor optimism in the economy, while Treasury yields have moved lower signaling slower economic growth and recession.

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