Markets Blog
David Matzko, LPL Research
U.S. stocks rebounded strongly this week, erasing the previous week's losses and more. Positive comments from NVIDIA (NVDA) midweek saw technology stocks lead the charge as the Nasdaq 100 and S&P 500 gained over 4% and 5%, respectively. This puts the S&P 500 within striking distance of new all-time highs. Treasury yields declined across the curve this week in anticipation of the Federal Reserve's (Fed) upcoming rate decision. Despite lower yields, Treasury auctions for shorter-term maturities were met with generally strong demand, reflecting investors' desire to lock in yields before impending rate cuts.
Index Performance
U.S. and International Equities
U.S. Equities: This week U.S. stocks recaptured the prior week’s losses and then some as markets attempted to shake off September’s reputation as a weak month for stocks. Technology led the bounce back as the Nasdaq Composite and Nasdaq-100 indexes each rallied more than 5%, while the S&P 500 jumped a not-too-shabby 3.9%, the best week for these benchmarks since November 2023. The S&P 500 sits less than one percent from its record closing high (as of 3:00 p.m. ET). Small caps went along for the ride, with the Russell 2000 Index also up about 4% on the week, while the Dow Industrials and the value-style indexes lagged.
The key to the strong week was the powerful reversal on Wednesday, led by technology, that turned a 1.6% intraday decline into a 1.1% advance. NVDA sparked the turnaround after positive comments about demand for its chips at an industry conference. Optimism surrounding the near-assured start of the Fed’s rate cutting campaign on September 18 and some well-received earnings reports, particularly Oracle’s (ORCL), also helped bolster sentiment even after slightly higher-than-expected readings on consumer and wholesale inflation. Only the energy sector finished in the red, while financials were dragged down by JPMorgan Chase (JPM) after a cautious net interest margin commentary.
International Equities: The broad international equity markets rose last week but were unable to keep up with the strong performance of the tech-heavy U.S. equity markets. Relative weakness was widespread with stocks in China, Europe, Japan, and the U.K. all lagging, with particular weakness in the Shanghai Composite, which fell more than 2% for the week as Chinese economic data continued to disappoint. Whatever help European markets may have gotten from the European Central Bank’s (ECB) 25-basis-point rate cut this week, it gave back as markets did not get as much dovishness from ECB officials about the outlook as they had anticipated given ECB President Christine Lagarde noted risks to growth were “tilted to the downside.” The STOXX Europe 600 Index rose 1.9% for the week in euro currency. Japan’s Nikkei 225 rose 0.5% in yen (and 1.7% in U.S. dollars), and the FTSE 100 gained just 1.1% in British pounds. Overall, the U.S. dollar-based MSCI EAFE and MSCI Emerging Markets (EM) indexes lagged the U.S. but gained more than 2% on the week.
Markets
Fixed Income: The Bloomberg Aggregate Bond Index traded higher on the week as Treasury yields, across the curve, were lower as markets await next week’s Federal Open Market Committee (FOMC) meeting. The yield curve further un-inverted this week with the 2-year yield falling more than the 10-year. Despite the fall in yields, the Treasury Department’s 3-year and 10-year auctions were met with very solid demand as investors locked in yields before rate cuts potentially push yields lower. That said, the 30-year auction did not enjoy the same success as the additional compensation for owning longer-maturity Treasuries remains unattractive, in our stance.
At next week’s Fed meeting, we expect a 0.25% rate cut (although it’s currently a coin flip that the Fed cuts by 0.50%) to take the fed funds rate back down to 5.25% (upper bound). Despite the recent payroll report that came in slightly weaker than expectations, it wasn’t weak enough to prompt the Fed, in our stance, to cut more aggressively at this meeting. Along with a slightly hotter inflation report this week, we think the Fed will be more methodical than what markets are currently expecting. The bond market has priced in a fairly aggressive rate-cutting cycle, with over 1% of cuts expected this year and an additional 1.5% of cuts expected next year. Repricing out the overly dovish market expectations may put upward pressure on bond yields in the near term. However, we recommend investors use any back-up in yields to add to high-quality fixed income as the path for rates is seemingly lower.
Commodities and Currencies: The broader commodities complex rebounded this week as oversold conditions and a weaker dollar brought buyers back into the market. The Bloomberg Commodity Index climbed nearly 3% and recaptured key support from the recent August lows. Falling yields and rising rate cut expectations ahead of next week’s Fed meeting also supported this week’s relief rally. Metals were a clear beneficiary of this backdrop and outperformed. Silver led gains with a +10% rally, while gold climbed over 3% and notched fresh record highs. Industrial metals also advanced, with copper adding close to 4%. Declining inventories in China and a jump in the Yangshan copper premium — the premium paid on imported refined copper and a key measure of Chinese copper demand — point to a tightening market. The energy patch was mostly positive as West Texas Intermediate (WTI) rose around 2.5% and snapped a four-week losing streak. Supply disruptions in Libya and production damage in the Gulf of Mexico due to Hurricane Francine contributed to the advance. A smaller-than-expected storage injection and above-average temperatures in the U.S. helped lift natural gas over 2%. In agriculture, coffee led gains with nearly a 9% rally as dry weather in Brazil and Vietnam sparked supply concerns.
Falling yields and increased speculation for a 0.50% interest rate cut next week dragged the dollar down by 0.2%. The greenback remains near a key inflection point, as a break below the 2023 lows would point to a new longer-term downtrend developing. The dollar/yen also slid to key support following another dose of hawkish commentary from the Bank of Japan (BOJ) and falling wholesale inflation. A break below 140 on the pair would add to the evidence that a major top has formed.
Economic Weekly Roundup
Key Takeaways From the August CPI and PPI Data: Consumer prices rose slightly in August, primarily driven by increasing shelter costs. While energy prices declined and food prices remained stable, services inflation (excluding rent) has been relatively contained. Overall, the inflation data suggests that the Fed may have more flexibility to focus on supporting the labor market. However, the services inflation could limit the extent of rate cuts in the near-term. Producer prices for final-demand goods grew at the slowest pace since February, indicating easing inflationary pressures. Global cost pressures have abated, particularly in China, contributing to the decline.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Empire Manufacturing (September)
Tuesday: Retail Sales (August), New York Fed Services Business Activity (August), Industrial Production (August), Business Inventories (July), NAHB Housing Market Index (September)
Wednesday: MBA Mortgage Applications (September 13), Building Permits (August), Housing Starts (August), FOMC Rate Decision, TIC Data (July)
Thursday: Current Account Balance (Q2), Philly Fed Business Outlook (September), Initial Claims (September 14), Existing Home Sales (August)
Friday: No releases
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