Last week was positive for major U.S. stock indexes, a stark contrast to the previous week.
What were investors thinking last week, and what might this holiday week bring for the financial markets? It is time for a quick update!
Index Overview
Tallying major stock indexes last week, the S&P 500 rose by 1.68%, the Nasdaq 100 rose by 1.87%, and the Dow Jones Industrial Average ended the week higher by 1.96%.
The Dow rose by the highest percentage of these three major indices as some slight sector rotation was on display.
U.S Stocks
The S&P 500 and the Dow hit weekly highs last week, as strong data from a business activity index put out by S&P Global showed a 31-month high. This index, which tracks both manufacturing and service sectors, provided a solid backdrop for investors last week, with the consumer discretionary, industrials, and consumer staples sectors all in the conversation.
We also saw strength in small-caps, and value stocks were the rave last week, outperforming their growth counterparts. This tends to occur during periods of sector rotation.
Q3 Earnings Summary
As of last Friday’s market close, 95% of S&P 500 companies have already reported third-quarter earnings.
Of these companies, 75% reported a positive earnings per share (EPS) surprise, and 61% of them reported a positive revenue surprise, according to data from FactSet.
For Q3, the blended year-over-year growth rate of these companies is 5.8%. Should 5.8% be the final growth figure once all S&P 500 companies have reported for Q3, it will mark the fifth consecutive quarter of annual earnings growth for the index.
Market participants love to see continued earnings growth!
Treasury Yields Consolidate
Consolidation was featured in the 10-year note yield as investors weighed the state of the U.S. economy. The quiet move slightly lower in the ten-year yield last week marked the first week of lower yields in the last five.
Shorter duration two-year note yields actually rose last week, settling near 4.379. While the 2/10 yield curve remains “normalized” after its recent “uninversion,” the two-year yield is remarkably close to the ten-year yield as of last week’s market close.
Crypto Breakout
If you like volatility and sharp moves, crypto was the place to be last week. Bitcoin, the largest cryptocurrency by market capitalization, rose sharply and approached the 100,000 level last week, reaching above 99,000 on the Coinbase exchange.
The extremely volatile asset space garnered plenty of attention last week, but will the rally continue? It is anybody’s guess. As a “newer” asset class than virtually all others (no pun intended), the virtual currency space is not for the faint of heart.
The Proshares Bitcoin ETF rose last week by 8.23%, and cryptocurrency exchange Coinbase was close to flat last week after its recent post-election surge in share price.
While it is easy to get caught up in mania surrounding a surging asset price, let’s remember to pour some cold water on ourselves and that a well-diversified long-term portfolio reigns supreme.
Bitcoin was trading at around 96,000 on the Coinbase exchange early Sunday afternoon.
Consumer Sentiment Mixed
Consumer sentiment rose in October, reaching its highest level since April 2024 but coming in below expectations. The index rose 1.3% in October, with the data print showing a 71.8 versus 73.0 expected.
Interpretations of the data print vary, with many analysts indicating a temporary pause in sentiment during the pre-election month.
“All year, consumers have repeatedly told us that the trajectory of the economy hinges on who becomes the next president,” University of Michigan Surveys of Consumers Chief Economist Joanne Hsu said in a statement. “Given the tightness of the race in its final weeks, consumers were fully aware that the result could go either way. Thus, the election had little immediate impact on the overall trajectory of sentiment.”
Other analysis focuses on the data showing the consumer feeling more confident, and many will look to the next monthly print and consumer confidence data (released Tuesday of this week) to firm up the read on the consumer at present.
Holiday Week
It’s an action-packed week, chock full of economic data releases to go with the turkey and pie! Fed meeting minutes from the last policy meeting are due for release on Wednesday, along with a slew of economic data, including GDP data and Core PCE, the Fed’s favorite inflation indicator. So, money managers will be watching with eager eyes.
It is the last full trading week of November, and U.S. stock markets will be closed on Thursday for the Thanksgiving holiday. An abbreviated trading session will occur on Black Friday for U.S. stocks.
It’s sure to be an active week, full of thanks and holiday cheer! Hope you have a wonderful Thanksgiving.
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Major U.S. stock indexes digested monthly inflation data last week, and market participants reacted to comments made by Fed Chair Powell. There was plenty of market-moving action last week, so let’s get to it with a quick update!
Tallying last week, the S&P 500 declined by 2.08%, the Nasdaq 100 fell by 3.42%, and the Dow Jones Industrial Average decreased by 2.60%.
Major U.S. Equity Indexes
It has been quite the post-election rally, and equity markets took a breather last week. After the S&P 500’s biggest five-day rally in a year, major U.S. stock indexes sold off ahead of key monthly inflation data, with rising Treasury yields and a rising U.S. dollar as catalysts.
Federal Reserve Chair Jerome Powell’s comments about the future of interest rate cuts added to last week’s sentiment — more on that in a minute.
Mostly In-Line Inflation Data
According to the most recent metrics released last week, inflation remained mostly unchanged in October but was slightly warmer than the previous month’s reading.
Consumer Price Index data showed a monthly increase of 0.2% in October, matching consensus expectations. This equaled a 2.6% year-over-year inflation rate, higher than the previous month’s 2.4% reading — so in line, but warm.
Core CPI, which excludes food and energy, also rose in line with expectations, tacking on 0.3% for the month and running at a 3.3% annual pace.
Once again, shelter costs were the primary factor contributing to the monthly rise in inflation, accounting for more than half of the increase. In October, shelter prices rose by 0.4% monthly and saw an annual increase of 4.9%. Despite an otherwise stabilizing inflationary environment, shelter pricing remains high.
Overall, the CPI data could be interpreted as in line with expectations, but with some overall stubbornness, as the data showed an overall rise from 2.4% in September to 2.6% in October.
CPI Market Reaction
Major U.S. stock indexes rose slightly on the morning of the data release, as the report suggested firming up expectations for a 25 basis point rate cut at the December meeting. The odds of such a rate cut moved higher on the data release day to around 82%.
But the mood of the markets would shift the next day, with Powell dampening expectations of a rate-cutting Fed.
Producer Price Index (PPI)
Producer pricing (wholesale pricing) showed a rise of 0.2% in September, matching Dow Jones estimates. Similar to CPI, this wholesale inflationary data came in at expectations, but it was still a rise from the previous month’s reading.
Verdict: Inflation is at expectations, but pockets of warmth are on the minds of many. Later in the day on Thursday last week, major U.S. equity indexes would trade lower — not as a direct response to PPI, but more due to Fed Chair Powell’s comments below.
FedWatch: Powell Commentary
With market reaction to CPI and PPI in progress, Powell tempered rate-cut hopes during a meeting at a speaking engagement titled “Global Perspectives” hosted by the Federal Reserve Bank of Dallas later in the day Thursday.
Powell’s comments threw some cold water on risk assets and translated to a fading rally across major US stock indexes.
Comments included that the Fed doesn’t need to be “in a hurry” to lower rates.
While Powell mentioned the economy is still strong, his comments were deemed as hawkish by the market at large, and rate-cut hopes diminished rather significantly.
At the close of last week’s trading, futures traders showed a 61.9% probability of a 25-basis-point cut at the December Fed meeting, according to the CME FedWatch tool.
Gathering consensus elsewhere, opinions are divided, and we will have to see what the Fed does — or says next. We are well aware that the Fed is “data-dependent,” and with inflation persisting and uncertainty surrounding the labor market, we need more data to get a read.
Government Bond Yields Rise
As major stock indexes fell last week on hawkish Fed commentary and open-to-interpretation inflation data, government bond yields rose.
Ten-year note yields gained around 12 and a half basis points to end the week near 4.429%, the highest weekly close since June.
Two-year note yields also moved higher, although not as much as the 10-year yield, gaining around 5 basis points, closing the week near 3.584%.
Perhaps recent pricing behavior in government bonds over the last couple of months was predicated upon the Fed getting more hawkish like we saw last week.
Gold Loses Luster
Gold bulls have been hibernating since the election after the shiny yellow metal touched all-time highs in the spot market pre-election near $2,790 per troy ounce. Spot gold closed near $2,563 per troy ounce last week, still higher by a handsome percentage for the year so far.
Reduced political uncertainty surrounding the election outcome and flows into equities could have given gold bulls some room for pause in the short term.
The Takeaway
We just had a monster post-election rally featuring the S&P 500’s best five-day stretch in a year. CPI and PPI data are constructive in that the inflation battle has been fruitful and productive, but there is room for interpretation on both sides of the argument in the eyes of the market.
The Fed sounded hawkish, and rate cut probabilities dwindling somewhat last week didn’t leave market bulls with much to hang onto temporarily. But we have come far rather quickly. Profit-taking is bound to occur for shorter-term traders. For long-term investors, however, the beat goes on until the next narrative takes form.
Let’s also be mindful that the interest rate markets have been telling us something for the last couple of months, as rates have risen in the open market. Even though the recent narrative has been for more rate cuts to come, the move higher in rates has been stubborn. So, an adjustment in market pricing for many assets was bound to occur. Let’s see what we get next.
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All eyes were focused on Consumer Price Index (CPI) data released last Thursday, as traders wanted to see the next chapter of the inflation narrative. The second trading week of (the usually volatile) October is in the books, and it was a good one for major stock indexes.
Summarizing last week’s trading, the large-cap S&P 500 gained 1.11%, the Nasdaq 100 increased by 1.18%, and the Dow Jones Industrial Average increased by 1.21%.
Mixed Inflation Data
Data showed a slight warming in inflation on the consumer level, with a monthly increase of 0.2% — a tick higher than estimates. The month brought a 2.5% year-over-year inflation rate, which was the lowest reading since February 2021 but still a tick higher than Dow Jones consensus estimates for 2.4%.
Core CPI, which excludes food and energy, tacked on 0.3% for the month versus expectations for 0.2%. The annual core CPI rate was at 3.3%.
Once again, shelter and food prices were the main culprits for the rise in overall consumer inflation, accounting for more than three-quarters of the rise in the all-important consumer inflation metric.
Janky Inflation Data?
If you are a fan of financial buzzwords, this one’s for you. Let’s add “janky” to the list!
In an interview last week, Atlanta Federal Reserve President Raphael Bostic mentioned that it is important to see if individual data points form a larger pattern or if there are just some “janky” data points (in reference to the September CPI data and jobs reports coming in hotter than expected).
Bostic, a voting member of the Federal Open Market Committee (FOMC), mentioned that the choppiness in recent data ”is along the lines of maybe we should take a pause in November” when referring to rate cuts.
So far, traders interpreted the warmer-than-expected CPI data in a “janky” way as well, with traders increasing their bets on a rate cut. Investors may be banking on the Fed continuing with its plans to continue to cut rates, despite inflation showing some quick signs of inching higher. Since the Fed just started with rate cuts about three weeks ago, the consensus may be for the Fed to stay the course and not deviate based on a few data points.
It is a dynamic time now. It’s October, data is up for continued interpretation, and the election is right around the corner.
CPI Market Reaction
Major U.S. stock index futures initially sold off upon the data release at 8:30 a.m. ET and traded lower for about half of the New York trading session, as the report indicated a run-of-the-mill 25-basis-point cut at the November meeting. However, the S&P 500 held its lows made upon the data release and closed the day very close to where it was before the CPI data release.
It was an interesting reaction to the data, as market participants figured out how a higher tick inflation print could affect the Fed at the next meeting. So, after an initial stumble reaction to the data and digestion, the S&P 500 found its footing on the day of the data release.
Producer Price Index (PPI) Data
The day after CPI was released, wholesale pricing showed no change in inflation, coming in below Dow Jones estimates for a 0.1% monthly rise. Major stock indexes reacted positively to the data and continued their upward journey, having a positive day to close out last week.
The most recent data for September puts the annual PPI rate at 1.8% and is constructive in the inflation easing theme.
This Week
October is in full swing, and the major U.S. equity markets have done well so far, as we enter the meat of the month. With CPI and PPI out of the way for October — and data showing a slight uptick in consumer pricing combined with flat producer pricing — attention this week turns to retail sales data in an otherwise quiet economic data release week.
Perhaps more time will need to pass for the markets to digest the recent inflation data.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Last week was one of anticipation in the financial markets as October and the fourth quarter began. All attention turned towards Friday’s payroll data — the crown jewel of the week. The first week of October trading showed us a slightly positive week in the S&P 500, as government bond yields rose and the U.S. dollar surged.
Summarizing last week’s trading, the large-cap S&P 500 gained 0.22%, the Nasdaq 100 rose by 0.13%, and the Dow Jones Industrial Average was marginally higher by 0.09%.
Huge Jobs Data
Without a doubt, the big data last week was Friday’s nonfarm payrolls, which came in as a monstrous outsized surprise to the upside. This indicates that the Fed’s 50-basis-point cut could potentially already be stimulating the labor markets.
The stimulation, intended by the Fed due to weakness in recent labor market data, was on full display with 254,000 jobs created versus Dow Jones estimates for 150,000.
The unemployment rate declined by a tick to 4.01% from last month’s reading of 4.1%. Average hourly wages also rose by 0.4% in the month and are higher by 4.0% compared to one year ago.
It’s The Revisions, Folks
Recent labor market concerns stem primarily from downward revisions (and overall lower job creation) going back over the last year to the tune of a decrease of 818,000 jobs.
In this month’s data release, however, the polar opposite ensued. The revisions this time showed August’s job creation total tacking on 17,000 additional jobs, and July was also revised upward by 55,000.
So, given recent downward revisions and the most recent upward revisions, payroll data is currently in a state of flux and will be analyzed heavily by traders and investors. Perhaps the data skew has added to the lingering element of uncertainty present in markets this October.
Jobs Number Market Reaction
Highly anticipated to gauge how the Fed and economy are doing, the jobs report was interpreted as bullish for stocks — at least on Friday. But buying was somewhat tame after the open, with the S&P 500 tacking on 0.90% on the session, making the S&P 500’s week positive. In contrast, a super bullish reaction to a jobs number could bring the SPX up, say, 2% for the sake of comparison.
Analysis of the jobs data is open to interpretation. Jobs created exceeding expectations and upward revisions to previously reported data indicate a strong economic backdrop and a resilient American economy.
Conversely, the excess in job creation could be interpreted as the rate cut making the economy run too hot. Could inflation concerns pop up in the future? It is just too early to tell, and more data is needed to gain consensus.
The chances of a 25-basis-point cut at the Fed’s November meeting closed the week at 96.2%, representing a large movement from the 46.7% probability at the beginning of the week. Chances of a 50 basis-point cut at the November meeting were just 2.6%.to close the week. There are varying interpretations of what a 50-basis-point cut could do for markets.
U.S. Dollar Rallies
Safe haven buyers were said to have emerged as Middle East tensions gained steam last week. The U.S. Dollar Index reached levels not seen since August.
After testing support near the psychologically critical 100.00 level, the U.S. Dollar index found buyers last week as government bond yields advanced higher.
Some assets, such as gold and silver, tend to have an overall inverse correlation to the direction of the U.S. dollar. But metal prices remained strong last week, silver more so than gold as gold finished the week slightly in the red. Still, gold remains overall resilient to last week’s powerful move upwards in the dollar — at least so far.
Escalating tensions and the consensus that the U.S. economy is resilient and strong contributed to the U.S. dollar’s rally this week.
Government Bond Yields Rise
The 2-year yield added around 36 basis points on the week and closed the week near 3.926%. Tens were also sold last Friday, contributing to the yield jumping around 23 basis points on the week, closing the week near 3.981.
The yield curve continued to remain normalized (uninverted) last week, although it lost ground in that regard. The gain in yield on twos outpaced the tens, narrowing the 2/10 yield spread to just four basis points.
This Week = CPI
The first week of the month showed us a jobs number, with jobs data revisions affecting the likelihood of the Fed doing a 25-basis-point rate cut versus a 50-basis-point increase. This week, we get Producer Price Index (PPI) and Consumer Price Index (CPI) data. Early expectations for headline CPI point to an annual increase of 2.3%, getting closer to the Fed’s 2.0% target.
As usual, all eyes will be on CPI this week, as traders will continue handicapping the odds of a 25- vs. 50-basis-point rate cut. Should inflation dip to 2.3% annually versus the last print of 2.5%, it may appear that the Fed is finishing up its inflation battle, but let’s remember that the Fed’s inflation target is 2.0%.
If inflation runs higher than expected, it could indicate that a larger than 25-basis-point cut could be needed, perhaps to the market’s delight.
Takeaway
October is underway in this election season! As the U.S. equity indices started October with moderate gains last week, this week has the data releases that are needed to shape near-term market direction and consensus. Rising bond yields and the U.S. dollar last week are in focus right now. As always, we will be staying on top of the latest developments to keep you informed.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
With the Fed aggressively cutting interest rates last week, now is the perfect time for an update.
Overall, financial markets welcomed the new lower benchmark overnight lending rate set by the Fed, with all-time-closing highs in the Dow and S&P 500 achieved.
Tallying the week, the S&P 500 increased by 1.36%, a weekly closing high; the Nasdaq 100 rose by 1.42%, and the Dow Jones Industrial Average rose by 1.62%, also a record weekly closing high.
50-Basis-Point Rate Cut
Ask, and you shall receive (eventually)! Markets have wanted a rate cut for quite a long time now, and it was finally delivered last week. And it was not just a run-of-the-mill 25 basis points either. The Federal Open Market Committee delivered a supersized 50-basis-point rate cut in an effort to stimulate the labor market and continue economic expansion.
In an action that suggests inflation is in the rearview mirror, Federal Reserve Chair Jerome Powell started the first monetary easing campaign in four years with a bang.
In the accompanying Fed Meeting press release, the Federal Reserve said: “The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”
Powell created a brand new financial buzzword in the process: “Recalibration.”
Recalibration Manifestation
Many of us remember financial buzzwords of the past, like inflation being “transitory,” which was not the case.
But a new word was born last week during the post-Fed rate decision press conference: recalibration.
The concept behind this sure-to-hear-more-about word is simple, and it took market participants a day to fully interpret and digest. It could be interpreted as a message that the easing cycle (rate-cutting campaign) is not about the economy being in recession, but rather that it is designed to continue fueling the economic expansion.
Moreover, the Fed’s action was deemed appropriate for shoring up the labor market.
These developments mark some different messaging and different actions than history would suggest. Rate cutting near stock market all-time highs is not something that would seem probable based on traditional economics, but here we are.
Rate Cut Market Reaction
Markets loved the Fed rate cut action, with the S&P 500 reaching all-time highs on the day of the announcement but fading late in the day.
However, in a “delayed fuse rally fashion” during the next trading session, the S&P 500 and Dow Jones Industrial Average reached fresh all-time daily closing highs.
The most cited reason for the soaring asset values on the day after the Fed rate decision was Federal Reserve Chair Jerome Powell’s “recalibration” commentary.
The consensus at the time was one of rate cuts shoring up the labor market and continuing the economic expansion, versus the need to stimulate the economy as a whole due to recession. This equates to a soft-landing consensus being achieved, at least for now!
Let’s remember that the S&P 500 closed at a weekly all-time closing high.
Treasury Yields / Normalization Continues
The 2/10 Treasury yield curve normalization continued last week, with the 10-year yield closing the week near 3.727%, and the 2-year Treasury yield closing near 3.597%.
So, the spread between 10s and 2s closed the week near 14 basis points, its third consecutive week of positive yield normalization, or “uninversion.”
Retail Sales Top Estimates
August retail sales data also fueled investor optimism, with data showing a rise of 0.1% in August, compared to expectations for a 0.2% decline.
Some commentary indicated that the stronger-than-expected retail sales data combined with falling energy prices. Consumers continue to spend freely despite the slowing in the labor market. It’s unclear if this is a smart move. Credit card balances have increased explosively throughout the recent inflationary period, and many Americans are dealing with high interest rate balances.
But this is America, and we are good at spending! Hopefully, the rate cut from the Fed last week will reduce overall interest payments to those with variable APRs in the coming months.
This Week
The economic news continues this week, with consumer confidence data, final lGDP data, Chair Powell’s comments at the U.S. Treasury Market Conference on Thursday, and Core Personal Consumption Expenditures data, the Fed’s preferred inflation metric on Friday.
Meanwhile, markets will continue to digest the recent interpretation of the Fed 50-basis-point rate cut. The more lenient lending environment should stimulate lending and generate additional activity in the financial markets.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock indexes digested continuingly tame inflation data last week, and market bulls were on parade as participants look forward to this week’s Fed meeting.
In summary, last week the S&P 500 added 4.02%, the Nasdaq 100 increased by 5.93%, and the Dow Jones Industrial Average rose by 2.60%.
Softening Inflation Data
According to the most recent metrics released last week, inflation continued to cool in August.
The grandfather of inflation data, CPI, showed continued cooling in inflation on the consumer level. Data for August showed a monthly increase of 0.2%, which equaled a 2.5% year-over-year inflation rate– the lowest since early 2021.
Core CPI, which includes food and energy, rose a tick above expectations, tacking on 0.3% for the month versus expectations for 0.2%.
The main culprit for the rise in the core was Shelter costs–accounting for 70% of the core increase–seeing monthly gains of 0.5% and an annualized increase of 5.2%. Used vehicles declined by 1%, while apparel pricing rose by 0.3%. And here we go again–egg prices rose 4.8% on the month.
CPI Market Reaction
Major U.S. stock indexes initially sold off upon the data release and fell throughout the day, as the report suggested to firm up expectations for a run-of-the-mill 25 basis point cut this Wednesday. Typically welcome news, the Dow briefly fell 743 points before mounting its biggest intraday comeback in almost two years.
Traders were busy handicapping hard versus soft landing probabilities and figuring out whether the Fed’s timing is right. Following the release of CPI data last Wednesday, traders priced in greater than 100 basis points of rate cuts over the final three Fed meetings this year. Positioning showed a 50-bp cut expected in November or December, with a 50% chance of seeing one this week.
The day after PPI data was released, Producer Pricing (wholesale pricing) showed a rise of 0.2% in August, matching Dow Jones estimates. Major stock indexes came into the data higher from the previous day’s CPI print and continued their upward journey, having another positive day.
FedWatch
With market reaction to CPI and cousin PPI last week being equity-market-supportive, last week painted a Fed-friendly picture.
As of the close of last week’s trading, futures traders show a dead heat between a 25 basis point cut and a 50 basis point cut at this Wednesday’s Fed meeting, according to the CME FedWatch tool.
Gathering consensus elsewhere, opinions are divided; we will have to see what the Fed does, and some may think a 25 bp cut leaves something to be desired as far as timing. A 50 bp cut would certainly loosen up lending and spur activity.
Government Bond Yields Decline
As major stock indexes rose last week, government bond yields fell, indicating expectations for lower Fed overnight rates and a risk-on attitude. Ten-year note yields lost around six basis points to end the week near 3.651%.
Two-year notes lost around 6.6 basis points, closing the week near 3.584%. With tens outyielding twos again this week, the 2/10 yield curve “uninversion” or normalization continued for a second week.
The Week Ahead
We find ourselves further into election season as the markets eagerly anticipate rate cuts starting this week. Using CME FedWatch Tool as an indicator, opinions are split down the middle–something we are not used to being this close to a Fed meeting date.
CPI and PPI data are constructive in that the inflation battle has been fruitful and productive, but it is not quite over yet. However, last week’s data showed that CPI is getting closer and closer to the Fed’s 2% annual target annual inflation rate.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Trading in the first full week of the month started sluggishly, as government bond yields dropped and volatility surged.
Overall, the large-cap S&P 500 lost 4.25%, the Nasdaq 100 decreased by 5.89%, and the Dow Jones Industrial Average was lower by 2.93%.
Mixed Jobs Data
As equity markets struggled last week, attention turned to Friday’s payrolls data–with expectations for 161,000 jobs. The actual August payroll data showed 142K jobs created, missing expectations. This data comes after a recent revision lowering the jobs created by 818K over a rolling 12-month period, so the market’s response to the miss was rather notable.
Reactions by traders were sour as the broader market indexes drifted lower, cementing the worst week for the S&P 500 since 2023. On a positive note, we got a drop in the unemployment rate, dipping to 4.2% from the previous reading of 4.3%.
Overall, the results were disappointing on the labor market front, but the result could increase the Fed’s chances of a 50 bp cut versus a 25 bp cut at the upcoming September 18th meeting.
Government Bond Yields Fall
As equities and oil slid last week, so did government bond yields. In response, some investors may be looking to lock in bond yields as lower yields are expected in the near future.
U.S. 10-year yields ($TNX) dropped to the lowest weekly closing levels since July 2023, ending the week near 3.711%.
Yield Curve Uninverts
For the first time since 2022, the 2/10 yield curve became uninverted–meaning that the 10-year yield (last week’s settlement of 3.711%) was higher than its 2-year counterpart (last week’s settlement of 3.681%).
The 2/10 yield curve had been inverted since 2022, where yields for short-term treasuries were higher than longer-term counterparts as the Fed raised rates. The outlook has changed, and we do not know if the yield curve normalization will continue nor what the implications will be.
Using history as an indicator, an economic slowdown could follow. We’ll see what this week brings.
The Week Ahead
It should be an interesting week, as traders will be handicapping the odds of a 25 vs 50 bp rate cut. Should inflation dip to 2.6% annually, it may signal that the Fed’s job is nearing its completion in the battle to lower inflation to its target of 2.0%. If inflation runs higher than expected, it could indicate that a larger-than-25 bp cut could be needed.
On Wednesday, we will get a fresh pulse on consumer inflation via CPI (Consumer Price Index) data. Last month showed a taming of inflation–and the market expects further taming.
Rounding out this week, we will get PPI data on Thursday, which will provide glimpses into inflation on the producer side and unemployment claims data.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
A highly-expected, ready-to-cut Fed at the upcoming September policy meeting dominated headlines in August after a quick volatility spike courtesy of the Japanese Yen carry trade unwind. Markets look to lower interest rates as a win.
Major Stock Indexes
Inflation readings during August supported the Fed’s broadcasted ambitions, with CPI, PPI, and the Core PCE Price Index cooperating.
For the month of August, the S&P 500 rose by 2.28%, the Nasdaq 100 shed 1.10% and the Dow Jones Industrial Average dominated the week’s trading and closed at a fresh all-time monthly closing high–higher by 1.76% in August.
Consumer Pricing Cools
The cooling inflation theme continued in August, with supportive data adding to the case for a Fed victory and further heightening the case for rate cuts to come. September looks like a near certainty for the first rate cut–it’s simply a matter of whether it will be 25 or 50 basis points.
Consumer Price Index data showed continued cooling for the month, with the annual inflation rate slowing to 2.9%–the lowest since 2021.
Government Bond Yields Fall
The benchmark 10-year note yield fell for the fourth consecutive month during August, falling by approximately 19.8 basis points and settling at 3.912% on the final day of trade in August.
As bond yields fall, bond prices rise. The recent drop in interest rates has been a boon for fixed-income investors who have held bonds for an extended period, and for those who decided to dip their toes over the last year amidst higher interest rates.
While the rising interest rates of 2022 and 2023 seemed a bit uncomfortable and foreign to many investors, let’s not forget that 10-year note yields have been much higher in the not-so-distant past. 30-year mortgage rates exceeded 17% in ‘81 and ‘82.
Labor Market Data – Revision in Focus
The most recent jobs report showed that employers added 114K jobs in July, a sharp slowdown from June. Unemployment increased to 4.3%, indicating some slowdown in the labor market as a whole.
The Takeaway
August was a volatile month in the beginning; fast forward a bit, however, and the volatility dissipated swiftly. As September gets going, keep in mind that it’s historically the most volatile month of each year. The fresh month and fall season moving in could create some urgency on some trade desks during this election year.
Long-term investors will experience multiple cycles of expansion and contraction over a lifetime. Depending on one’s goals, there may be alternative opportunities in fixed-income, while for others, simply staying the course may be suitable. Remember to think long-term.
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Major U.S. stock market indexes rose last week, as the S&P 500 increased by 1.45%, the Nasdaq 100 traded higher by 1.09%, and the Dow Jones Industrial Average rose by 1.27%.
Fed Minutes: Rate Cut in Focus
The most recent Fed meeting minutes contributed to last week’s broader gains in major U.S. stock market equity indexes. Notes from the July meeting showed that officials are poised to cut interest rates, plan to move forward with a cut in September, and even considered one at the previous meeting.
While all officials voted to hold rates steady at the July meeting, an unspecified number of them were inclined to start easing at the July meeting rather than waiting until September.
The July meeting minutes indicated that a rate cut is likely to occur in September. With the September meeting about a month away, we will see what happens next.
Jackson Hole Symposium
Markets like clarity and certainty, so all eyes were on the Jackson Hole Symposium last Friday afternoon to see if Federal Reserve Chair Jerome Powell could add some color or virtually confirm the Fed’s potential direction for the rest of this year.
Powell had some choice words: “The time has come” for rate cuts. Policymakers do not want to see the job market cool any further.
Powell is remembered for his commentary at the 2022 Jackson Hole Symposium, where he warned of economic pain. “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” he said during the 2022 meeting.
Potential Market Response
Major U.S. stock indexes responded to those 2022 comments to the downside after the September meeting. Buyers then emerged in October 2022.
But this year’s meeting featured a different takeaway — one of inflation-busting success and impending rate cuts.
“My confidence has grown that inflation is on a sustainable path back to 2%,” Powell said in his keynote speech at the Fed’s annual economic conference in Jackson Hole.
This tone was positively interpreted by markets at the close of last week.
U.S. Dollar Declines Last Week
In a mostly “risk-on” style of trading last week, the U.S. dollar fell against other major currencies, contributing to gains in dollar-denominated assets, including gold and bitcoin. Overall:
So, it was one of those weeks where declining bond yields and a declining dollar positively impacted many risk assets.
By nature, many traders, however, are looking for a bottoming dollar via the US Dollar Index (DXY), as the index value’s decline approaches the key psychological level of 100.00. The DXY measures the strength of the US dollar against a basket of six other currencies.
Government Bond Yields Fall
Markets like certainty, and if they can’t have that, they look to bond yields for clues about the direction of the U.S. economy. Notably, Treasury yields have been trending lower since April, even though the seemingly forever-anticipated rate cuts haven’t occurred yet.
Let’s remember that markets, in general, are forward-looking price discovery mechanisms. Perhaps the bond market has been trying to tell us something or potentially confirm the Fed’s course for quite some time.
Existing Home Sales Tick Higher
For the first time in five months, existing home sales data for July showed gains in closed transactions.
At an annualized rate of 3.95 million units, gains were a tad better than expectations for 3.94 million units. That’s a 1.3% rise from June. Year-over-year, the number of closed sales was 2.5% lower, however.
Declining mortgage rates over the last month or two played a role in the pickup in transactions. All-cash closed transactions made up 27% of closings in July versus 26% last year.
Nationwide median sales prices, however, did not cool, even with an increase in supply. The average closed transaction price was $442,600 in July, 4.2% higher than a year ago.
Doesn’t sound right? That’s the national data, and here is the associated methodology. Sales saw the biggest gains in the Northeast and were flat in the Midwest.
Payrolls Revision
Last week, nonfarm payrolls were substantially revised (-0.5%) — the largest revision since 2009. The revision measures total nonfarm payrolls over the preceding 12-month period. The data comes via an annual benchmark revision by the Bureau of Labor Statistics.
That’s 818,000 payrolls cut from the last 12 months (-0.5%). Food for thought!
The Takeaway
The time has come for rate cuts. Powell said so in the annual Jackson Hole Symposium last week, and the market is eagerly awaiting them. Fed minutes also showed the collective acceptance of rate cuts and the willingness of the Fed to cut rates sooner rather than later.
The declining dollar last week could help to spur asset prices in the short-run, yet the U.S. Dollar Index is approaching potential support levels.
The annual Jackson Hole Symposium indicated an accommodating Fed in general (i.e., a Fed that is ready to cut and a Fed that does not want to see any more decreases in labor markets). The Fed should live in traders’ and investors’ minds this week, yet we are in an election season.
Moving Forward
For major economic data releases this week, we get consumer confidence, weekly unemployment claims, gross domestic product (GDP) data, and Core Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation gauge.
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Last week was a wild one in the U.S. financial markets. There was plenty of emotion and news moving markets, triggered by an unwinding of the Japanese Yen carry trade. (More on that in a minute.)
U.S. Stock Indexes
After making record highs in July, the S&P 500 continued its retreat for the fourth consecutive week — but barely. The broadest measure of the U.S. economy flirted with ending the week in positive territory after being down by 3.00% in last Monday’s trading session.
Overall, for the week ending 08/09/24, the S&P 500 declined by 0.04%, the Nasdaq 100 was actually higher by 0.39%, and the Dow Jones Industrial Average decreased by 0.60%.
It was a wild week with the lows in major indexes made on Monday and a grind higher (with volatility) for the remainder of the week.
Yen Carry Trade
With volatility spiking last week, the main culprit was the “yen carry trade.” So, here is a basic overview of what a carry trade is and what exactly happened.
Ripple Effects at Home
We saw volatility, as measured by the $VIX index, spike last Monday to levels unseen since COVID in March of 2020, according to Factset.
Traders and market veterans will tell you that the VIX index spiked above 60 in Monday’s premarket trading, ahead of the 9:30 cash open, and that it never actually transacted at that level.
We can see the extreme spike in fear faded rather quickly once last week’s trading got started in cash markets. After spiking above 60, the $VIX settled near 20.37.
So, volatility spiked and quickly dissipated. In fact, the $VIX Index finished in the red last week, losing 14.38%. How about that? The S&P 500 and the $VIX tend to move in opposite directions overall. (Generally speaking, they are quite negatively correlated.)
Stock valuations and a recent surprise uptick in unemployment here at home surely contributed to the volatility last week, even though they were not direct catalysts.
Japan
As U.S. investor’s nerves began to settle down as last week progressed, many may have thought “Hey, this is a Japan problem.”
The Bank of Japan has kept rates near and below zero for an extended period and executed its first rate hike in 17 years.
But keeping the rate around zero for such a long time, especially with inflation running hot worldwide for the last several years, has its repercussions. Inflation is accelerating in Japan, and the rate hike was necessary to keep things in check.
Japan’s major stock market index, the Nikkei 225, experienced its worst one-day drop since 1987 as the fallout occurred.
This Week: CPI & PPI
As markets continue to digest last week’s volatility, this week brings fresh inflation data in the form of Consumer Price Index (CPI) & Producer Price Index (PPI).
Barring a surprise in CPI, this week’s price action (movement of stock prices over time) may play the most important role. We will just have to see how the continued digestion of events in Asia plays out, along with market sentiment surrounding the labor market and stock valuations during this election year.
We also get retail sales this week to gauge the consumer, as economists debate the short versus hard landing scenario.
Dictate What Happens
Volatility comes and goes in markets — and man, did it come and go quickly last week. Let’s remember that the S&P 500 was 24.23% higher in 2023 and is currently 12.04% higher so far this year (as of market close on 08/09). Corrections or pullbacks are bound to happen.
Nobody knows what this week will bring yet, but volatility could persist from last week’s levels, given the rebounding Iran/Israel narrative, Japan factors, CPI data here in the U.S., and other factors.
As a long-term investor, it is wise to think ahead and dictate what happens instead of reacting to it.
While an investor can’t dictate the price of assets, they can dictate their reaction to price fluctuations. Responses will vary depending on one’s investment objectives and time horizons, among other factors. But in many cases, no action is needed other than sticking to the existing plan.
Uncertainty tends to reward investors over time, so sticking with a diversified portfolio including bonds can be one great way to attempt to minimize volatility in an investor’s portfolio.
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