As investors' concerns about the US economic recession further eased, the US stock market experienced its best weekly performance of the year last week and successfully recovered from the losses at the beginning of the month.
Now, investors are focusing their attention on the Jackson Hole Global Central Bank Symposium in the coming week. How the Federal Reserve will release signals at that time will become the focus, and the impact on risk appetite may become a catalyst for further market upward movement.
US economic data signals
Similar to before, major economic data released in the past week indicate that non farm payroll in July may only be an abnormal indicator. The US Consumer Price Index (CPI) increased by 2.9% year-on-year in July, returning to below 3% after three years. After excluding volatile food and energy components, the core CPI rose by 3.2%, the smallest increase since April 2021.
In addition, retail sales in the United States increased by 1% in July, far exceeding expectations and reaching a new high in nearly a year and a half. The recovery of consumer demand is crucial for the US economy to achieve a soft landing. There are also signs of recovery in the job market, with 227000 initial jobless claims last week, lower than the expected 235000 and the previous value of 233000. This may further strengthen the view that the July non farm payroll report may indeed be negatively affected by Hurricane Belle, and the labor market will continue to remain resilient.
Bob Schwartz, Senior Economist at Oxford Economics, stated in an interview with First Financial News that overall and core CPI growth is largely consistent with forecasts, but rental stickiness needs to be monitored. At the same time, the recovery of retail monthly rates is related to the diminishing impact of the network attack on car sales in June. He believes that a strong household balance sheet and resilient employment growth will drive consumer spending to grow at a rate of around 2% for the remainder of this year, ensuring a smooth economic expansion.
As expectations of an economic soft landing rise, US Treasury yields fluctuate narrowly. The yield of 2-year US Treasury bonds rose 1 basis point to 4.06%, while the benchmark 10-year US Treasury bond fell 5.1 basis points to 3.89%, still at a low level for the year. Federal funds rate futures show that the probability of a 25 basis point rate cut expected in September has exceeded 50%, making it the most popular option.
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, said, "We believe that economic growth is slowing down, inflation is also weakening, and the Federal Reserve will start cutting interest rates, but there will be no panic. We will see 2-3 interest rate cuts, most likely 2 rather than 3, unless the unemployment rate continues to rise
Next, investors will turn their attention to the next week. Federal Reserve Chairman Powell will give a speech at Jackson Hole next week, and his views on recent data are expected to set the tone for the easing cycle that begins in September. Chicago Fed President Goolsby said last week that there are no signs of overheating in the US economy, so central bank officials should be wary of the prolonged implementation of restrictive policies.
Schwartz told First Financial that from the current macroeconomic performance, the Fed's September interest rate cut is a foregone conclusion, and the traditional 25 basis points is more appropriate compared to 50 basis points, unless there is another deviation in the US non farm payroll in September. As salary and employment growth gradually slows down, real income growth is weakening, but sufficient speed should be maintained to support spending and establish a foundation for sustained expansion and a soft landing.
Can the market continue to rebound
As of last Friday, the S&P 500 index and the Nasdaq have achieved seven consecutive daily gains, and the three major stock indexes have also regained lost ground from the sharp decline two weeks ago.
The better than expected data has eased concerns about a sharp slowdown in the world's largest economy, "said Mike Reynolds, Vice President of Investment Strategy at Glenmede Trust." This week's data suggests that the sky is not collapsing as some investors began to worry. So far, all the data we have before the next Federal Reserve meeting provides strong reasons for a rate cut
With the resurgence of optimism towards artificial intelligence, technology companies are generally experiencing a rebound, with AI benchmark Nvidia rising nearly 19% in the past week, marking its best performance since May last year. The comments of Wal Mart's CEO are believed to restore people's confidence in the practicality of the technology. Quencey Crosby, chief global strategist of LPL Financial, a brokerage firm, said: "When AI began to become the main narrative of the market, it was seen as a technology that would help the company simplify its operating system and improve productivity." Crosby said that in recent quarters, developers of generative AI were difficult to express plans to monetize the technology, and Wal Mart provided hope in this regard.
According to the latest monthly institutional survey by Bank of America, despite the turbulence in global financial markets, investors' optimism towards American tech giants and expectations of an economic soft landing have not weakened. The survey results show that respondents' expectations for a soft landing have increased from 68% in July to 76%.
Part of the funds have already started to flow back. Scott Rubner, Managing Director of Global Markets at Goldman Sachs, stated that in the past month, systematic fund CTA sales, which buy stocks based on market signals and volatility trends rather than fundamentals, have reached their largest scale in four years in terms of US dollar amounts. However, now that the market has calmed down and the Chicago Board Options Exchange volatility index VIX has fallen below its long-term average, it is estimated that the scale of systematic fund stock purchases will reach as much as $1 trillion
Jiaxin Wealth Management wrote in its market outlook that the main catalysts for last week's rebound included low inflation data and strong retail sales reports, all of which indicate economic health. The report suggests that perhaps the increase in unemployment rate is more related to the increase in labor supply rather than large-scale layoffs. Based on the rebound of the stock market in the past two weeks, the market seems to be shifting from concerns about growth to the "soft landing" camp.
The institution believes that the US stock market is expected to continue to rise in the coming week. Powell may convey a moderate tone at the Jackson Hole Central Bank annual meeting, which should be favorable for bulls. On the other hand, in the short term, there may be continued overbought on the technical side, which could lead to profit taking in the index. In addition, geopolitical headline risks are still on investors' radar. Therefore, there may be slight fluctuations in the trend, but the signal of the Federal Reserve's interest rate cut is expected to become a sufficient reason to increase stock exposure.