As non-farm data further reinforces signs of a slowdown in the US economy, expectations for the Federal Reserve's September rate cut are heating up again.
Against the backdrop of a significant decline in US bond yields, the resurgence of risk appetite has stimulated funds to flow back into the broader technology stocks, and the communication services and information technology sectors have ushered in new milestones. In the coming week, the latest Consumer Price Index (CPI) may intensify the market's game over policy paths, and the highly anticipated new financial reporting season may also be a potential source of volatility.
September interest rate cut returns to view
The multiple data released last week further showed signs of cooling in the US economy.
The growth of the US job market further slowed down in June, with the unemployment rate reaching its highest point in two and a half years at 4.1%, while wage growth fell back to 4.0% once again. This is consistent with the previously released ADP employment report and the trend of unemployment benefit applicants, supporting the rebalancing of the labor market.
Bob Schwartz, senior economist at the Oxford Institute of Economics, said in an interview with First Financial reporters that the June employment report showed more signs of cooling in the labor market. It is worth noting that the data for the first two months has been significantly reduced, while the latest employment growth rate has narrowed, with healthcare and government jobs accounting for about three-quarters of the growth. On the other hand, behind the slight increase in unemployment rate, it is due to the fact that the unemployment rate of golden age workers has risen to its highest level since November 2021. He expects that weak labor demand will further slow down wage growth, thereby increasing the Federal Reserve's confidence in inflation returning to its 2% target.
At the same time, the widening trade deficit and unexpected contraction of the service industry are also signals of a decline in consumer demand. The US Department of Commerce stated that the trade deficit increased by 0.8% in May, reaching $75.1 billion. The Institute for Supply Management (ISM) non manufacturing index fell to 48.8, breaking the boom bust line for the second time in three months.
The market's expectations for the Federal Reserve's interest rate cut have risen again, with medium - and long-term US bond yields under pressure and declining. The 2-year US bond, closely related to interest rate expectations, fell 15.2 basis points per week to 4.599%, reaching a new low since March. The benchmark 10-year US bond fell 11.9 basis points per week to 4.272%. The federal funds rate futures show that the probability of a rate cut in September is once again above 70%.
Peter Cardillo, Chief Market Economist at Sparta Capital Securities, believes that the pace of the US economy's decline is slightly faster than previously thought, and non-farm payroll puts the Federal Reserve in a comfortable position. "If this situation continues next month without an increase in hourly wages, then I think we will see interest rate cuts in September and another one in December," he said
Schwartz told First Financial reporters that from the minutes of the Federal Reserve meeting, the Federal Open Market Committee is more confident that inflation has recovered and slowed down, while acknowledging that the risks of its dual goals of price stability and full employment have been better balanced. "The Federal Reserve is increasingly concerned about the downside risks in the labor market, which increases the possibility of a rate cut in September. The Fed also needs to plan for unexpected situations, as transitioning to slower but sustainable growth rates is often not a smooth path," he said.
Technology stocks continue to lead the market
Against the backdrop of a decline in US bond yields boosting risk appetite, tech stocks in the broader market drove the Nasdaq and S&P 500 index to once again reach new highs last week.
According to Dow Jones market statistics, communication services and information technology have risen nearly 4% in the past week, once again leading the market. The S&P Information Technology Index has reached a historic high, while the communication services sector has reached its highest level since 2000. Microsoft, Meta, Amazon, and Apple all hit historic highs in late trading.
The expectation of interest rate cuts and the dovish remarks made by Federal Reserve Chairman Powell at the European Central Bank forum last week have boosted the market, and funds continue to flow into US stock funds. According to data provided by the London Stock Exchange (LSEG) to First Financial reporters, net purchases by US stock funds reached $8.62 billion last week, with large cap funds increasing their holdings by $8.46 billion, which is consistent with the recent strong performance of technology stocks.
As the second quarter financial reporting season approaches, it remains to be seen whether Wall Street's gains will expand beyond technology stocks, and whether the profits of these companies can continue to support high valuations.
Joseph Cusick, Senior Vice President and Portfolio Expert at Calamos Investments, said investors are still aware that the lack of market breadth may affect the trend in the second half of the year. 10 stocks account for approximately 33% of the total weight of the S&P 500 index, and this imbalance has only occurred three times in the past. "Many people have seen the pressure of increased risk. The essence of market dominance has not diminished, but as the market reaches historical highs, investors should not give up active portfolio management and strategic diversification," he said.
Jiaxin Wealth Management wrote in its market outlook that the catalyst for the rise is weak economic data, and the continued "melt up" in the technology sector is the theme. The sustained bull market momentum and capital inflows have brought the market into a familiar rhythm.
The institution believes that short-term technology stocks are still in the overbought zone, indicating that there may be pressure to test the moving average at some point. There are still many risk factors in the coming week, including inflation data (CPI, PPI) and the second quarter financial report season. JPMorgan Chase, Citigroup, and Wells Fargo Bank will announce their results. According to FactSet data, the profit growth rate of S&P 500 index constituent stocks is 8.8%, which will be a new high since the first quarter of 2022. Relatively speaking, the higher the expectation, the greater the potential volatility risk in the market.