Markets Blog
David Matzko, LPL Research
Weekly Market Performance for the week of August 12, 2024. Data, data, and more data was this week’s theme across global equity and fixed income markets. With mostly optimistic macroeconomic data easing recession and economic growth concerns, paired with a surge from technology stocks, U.S. indexes delivered strong gains in the shadow of last week’s turbulence. Overseas, with U.S. data in focus, and a fresh batch of macro data in markets such as Japan, China, the United Kingdom, and the broader European Union, most indexes closed in positive territory. U.S. Treasury bond prices gained ground over the last five sessions, as improved economic sentiment placed downward pressure on longer-term Treasury yields. In commodities, oil failed to extend last week’s advance on dynamics from the Middle East.
Index Performance
U.S. and International Equities
Markets: After volatile trading last week, U.S. stocks found their footing to deliver strong weekly gains amid key economic data. Big tech stepped back into the driver’s seat as the standout in this week’s rally, and positive high-profile earnings powered the S&P 500 3.9% higher. On the back of technology’s outperformance, the Nasdaq Composite closed the week nearly 5.3% in positive territory, while the industrial-heavy Dow Jones index added 3% over the last five sessions. Small caps surged on Thursday after otherwise muted trading to advance 2.9% this week.
Rate cut expectations and economic data remained top of mind for Wall Street, as markets focused on reinforced disinflation traction amid a big week for U.S. economic data. Markets advanced as July inflation data were upbeat, with the Producer Price Index (PPI) arriving cooler than expected, revealing that wholesale price inflation rose less than expected. Just 24 hours later, the July Consumer Price Index (CPI) was consistent with forecasts to continue this trend, remaining at the slowest pace since early 2021. Retail sales and jobless claims data underscored the strength of the economy, sparking an extended rally for equities. Although markets wobbled on a stall in housing starts and building permits Friday, major indexes were well on track for weekly gains. The earnings front was headlined by Walmart (WMT), which is commonly regarded as an indicator of the consumer, delivering an earnings beat and sending shares higher. Additionally, shares of Home Depot (HD), Cisco Systems (CSCO), and Deere & Co. (DE) gained following positive reports.
European markets also kept U.S. data in mind amid a big data week of their own, as the STOXX 600 index of European exchanges ended the week nearly 2.5% higher. Stocks broadly advanced Wednesday following steady second quarter Eurozone gross domestic product (GDP), despite trading mixed after an expected fall in U.K. unemployment and softer-than-expected weekly earnings from the U.K. on Tuesday. Nonetheless, bolstered rate cut bets for the Bank of England (BOE) and waning concerns about the U.S. economy pulled markets into positive territory late in the week, overshadowing mixed macro data and a negative turn in the German-based ZEW market sentiment indicator for the European Union.
Economic data was also prevalent in Asian markets, as a flurry of overall tepid releases were overshadowed by a surge in technology names, propelling Asian markets higher on the week. Japan continued to rebound and lead weekly gains on better-than-expected GDP results, despite a slight rise in July PPI. Mainland China ended the week mostly higher as rising unemployment and a slowdown in exports, with only a marginal increase in consumer spending, served as evidence the economic slowdown is persisting. Furthermore, China’s ongoing battle to tame runaway bonds weighed on stock market performance and sentiment following reports the state could pause its efforts to cap bond prices. Elsewhere, South Korea and Taiwan ended higher on high-flying tech stocks, while New Zealand rallied on a 0.25% rate cut.
Fixed Income: The Bloomberg Aggregate Bond Index traded higher over the last five sessions, as a packed week of macro data drove Treasury bond prices higher (yields lower). The 10-year Treasury yield closed five basis points lower, and the monetary policy-sensitive two-year yield was little changed.
After Thursday’s better-than-feared economic data, rate cut expectations were once again priced out with only a 20%–30% expectation of a 0.50% rate cut at the September Fed meeting (down from 98% earlier this month). Markets started pricing in aggressive rate cuts after the recent jobs report, but rate cut expectations still appear too aggressive, in our perspective. Another weak jobs report would put a 0.50% cut in September on the table, but we think the market is currently overestimating that probability. Moreover, markets have priced in some chance of a 0.50% cut at each of the next five Fed meetings.
But market pricing over the past few weeks has been as much about market dynamics and crowded investor positioning as about the evolution of economic fundamentals. The summer months are notoriously volatile due to the lack of liquidity in markets, so we would expect rate cut expectations to continue to oscillate throughout the third quarter. There are risks, of course — from the data, from geopolitics, and from the market fragility exposed in the most recent episode. However, at times, markets can move too far in either direction and the best strategy is to fade the noise and stick to longer-term plans.
Commodities and Currencies: The benchmark Bloomberg Commodities Index ended the week 0.36% higher. Oil’s wild ride continued as upward and downward pressure continued to swing prices, but West Texas Intermediate (WTI) crude ultimately ended 2% lower. Friday’s weak housing report was somewhat negative for overall energy demand, while continued demand concerns from a rocky Chinese economy were bearish factors for crude prices. On the other hand, lower U.S. inventories and anxiety of an attack by Iran against Israel that would disrupt crude suppliers provided support —– yet prices fell as an attack has not materialized in the Middle East. The U.S. dollar index, measuring the greenback against a basket of currencies, ended the week lower, near seven-month lows, as optimistic economic data and bolstered rate cut bets provided downward pressure. As the unwind of the carry trade edges closer to its end and U.S. recession fears fade, the Japanese yen weakened sharply, in its biggest weekly decline since June. Gold reached a new record high, while silver and copper also ended the week higher.
Economic Weekly Roundup
Retail Sales Play Catch-up. A rebound in auto sales from generous incentives pushed headline retail sales up in July. Retail sales rose almost a full percentage point, supported by a rebound in motor vehicle and parts sales. It’s no surprise that auto sales rose since new-vehicle incentives were the highest in more than three years. Average incentives in July rose to 7% of the average transaction price, up from 6.4% in June. The downward revision to the previous month made July’s monthly gain in retail sales more pronounced.
Solid disposable income growth gave the consumer ample ability to keep the retail economy growing. However, this report will not likely change the Fed’s calculus about cutting rates in September. We heard from Atlanta Fed President Bostic that the Fed cannot afford to be late in cutting rates as unemployment increases. Investors should expect more volatility in the near term as the economic data likely give conflicting signals.
CPI Rose 0.2% month-over-month. Higher shelter costs accounted for nearly 90% of the monthly increase in the CPI. July consumer prices rose 0.2% from a month ago, pulling the annual rate down to 2.9%. Prices rose in July for shelter, insurance, education, and personal care. Prices fell for used autos, medical care, air fare, and clothing. Energy was unchanged in July, after decreasing 2% in June. The annual rate of inflation for both headline and core prices rose the smallest since early 2021.
Investors and policymakers alike will find this report mostly good for markets and the economy. As inflation decelerates, the Fed can legitimately cut rates yet keep policy restrictive overall. Unless the global economy experiences another shock, the Fed will most likely cut rates by a quarter percent in September. The probability of the Fed cutting by a half percent is still elevated since investors are still somewhat skittish from recent events.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Leading Index (July)
Tuesday: Philadelphia Fed Non-Manufacturing Activity (Aug)
Wednesday: MBA Mortgage Applications (Aug 16), FOMC Meeting Minutes (July 31), BLS releases preliminary annual payrolls benchmark revision
Thursday: Chicago Fed National Activity Index (July), Initial Jobless Claims (Aug 17), Continuing Claims (Aug 10), S&P Global U.S. Manufacturing PMI (Aug preliminary), S&P Global U.S. Services PMI (Aug preliminary), S&P Global U.S. Composite PMI (Aug preliminary), Existing Home Sales (July), Kansas City Fed Manufacturing Activity (Aug), Jackson Hole Economic Policy Symposium (Aug 22–24)
Friday: New Home Sales (July), Kansas City Fed Services Activity (Aug), Fed Chair Jerome Powell Speaks at the Jackson Hole Policy Symposium
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