At the beginning of this month, the closure of yen carry trades and concerns about recession caused market turbulence, and there were speculations of an emergency interest rate cut. Subsequently, the economic data and the signal of the Federal Reserve's policy shift seemed to have once again put the US stock market through the test of crisis, with the Dow Jones Industrial Average breaking a new historical high and the S&P 500 index rising for the fourth consecutive month.
The upcoming non farm payroll data will be the first test for the September market, which is expected to determine the magnitude of the Fed's first interest rate cut, and the market also needs more positive stimulus factors.
Waiting patiently for non-agricultural activities
As the most closely watched indicator last week, the US Personal Consumption Expenditures (PCE) price index for July increased by 0.2% month on month and 2.5% year-on-year, unchanged from June. Excluding volatile food and energy components, the core PCE increased by 2.6% year-on-year, in line with market expectations. At the same time, the monthly rate of consumer spending accelerated to 0.5% last month, ensuring the resilience of the economy.
The decline in inflation expectations is also expected to alleviate pressure on the Federal Reserve. The monthly consumer confidence survey by the University of Michigan showed that one-year inflation expectations fell 0.1 percentage points to 2.8%, the lowest level since December 2020. The sentiment index rose slightly from an eight month low of 66.4 to 67.9, ending the previous four consecutive months of decline.
Bob Schwartz, Senior Economist at Oxford Economics, stated in an interview with First Financial News that core inflation is approaching the Federal Reserve's 2% target. As prices gradually fall back to the target level, the Federal Reserve is paying more attention to the health of the economy. Although there are doubts about whether expenditure growth will remain so strong in the long term, this reflects the elasticity of the labor market, interest rates, and the balance sheets of most households. On the other hand, Schwartz believes that the rise in consumer confidence reflects the decline in inflation and the upcoming interest rate cuts. Although the unemployment rate may continue to rise in the short term, this may reflect an increase in labor supply rather than an increase in permanent layoffs that harm spending.
The latest price indicators have paved the way for the Federal Reserve to cut interest rates for the first time next month as they shift their focus to the labor market. Federal Reserve Chairman Powell stated at the Jackson Hole Global Central Bank Annual Meeting that it is time for policy adjustments, and the timing of interest rate cuts will depend on the upcoming data release. He also emphasized employment, stating that he will not seek or welcome further cooling of the labor market conditions.
The yield of US Treasury bonds rebounded slightly, with the 2-year Treasury bond closely related to interest rate expectations rising 14 basis points to 3.93% and the benchmark 10-year Treasury bond rising 10.4 basis points to 3.91%. Federal funds rate futures show that the market's balance for the September rate cut is stable at 25 basis points.
Ben Ayers, senior economist at Nationwide Life Insurance, wrote that recent price trends confirm that the Federal Reserve's inflation battle is coming to an end. Ensuring a rate cut at the policy meeting on September 17-18, "further cooling of inflation may prompt the Federal Reserve to act more aggressively at the upcoming meeting, especially in the face of a sharp deterioration in the labor market
Schwartz told First Financial that the US economy is still in a transitional period and will enter a more sustainable growth rate in the future. Overall, the likelihood of an economic recession in the next 12 months is low, but certainly not zero.
Schwartz believes that cautious risk management may have a greater impact on the Fed's future response, as risks are not asymmetric. Although the unemployment rate has its flaws and exaggerates the weakness of the labor market, the Federal Reserve will not tolerate further increases. He analyzed that the August employment report will determine whether the Federal Reserve will cut interest rates by 25 basis points or 50 basis points in September, and it is expected that the unemployment rate will decrease in August. Unless job growth slows down rapidly, the situation will become tricky.
Market growth may require more stimulation
The global market has ended a turbulent month, as signs of a sudden slowdown in the labor market have raised concerns about a recession, and the impact of yen carry trades has exacerbated the plunge. Since then, data has shown that the momentum of the US economy has stabilized, easing investors' nervousness. Last week, the Dow Jones Industrial Average hit a new historical high, and the S&P 500 index is also within reach.
According to Dow Jones market data, the financial industry rose 2.9% last week, leading the market. Industries, materials, healthcare, energy, and utilities saw an increase of over 1%. In contrast, the technology and communication services sectors, which performed well in the first half of the year, fell 1.5% and 0.7% respectively, leading the market in decline. The weight growth sector has encountered two major negative factors, with Supermicro Computer experiencing a nearly 30% drop last week. The company stated that it may not be able to submit its annual report for the fiscal year ending on June 30th on time, while Hindenburg Research claimed that the company engaged in accounting manipulation.
Artificial intelligence leader Nvidia has announced its highly anticipated performance. Although overall meeting expectations, the revenue guidance slightly disappointed investors, causing concerns about the sustainability of its performance. Regarding the trend after the financial report, Quencey Crosby, Chief Global Strategist at LPL Financial, a brokerage firm, said, "What is clear in the market now is that, apart from guidance, the surprise factor has weakened, and Nvidia will increasingly find it difficult to impress investors with data
According to the flow of funds, global bond funds attracted the largest weekly inflow in six weeks last week, mainly due to investors' expectations of the Federal Reserve's interest rate cut in September and the ongoing tensions in the Middle East. According to data provided by LSEG of the London Stock Exchange to First Financial reporters, investors have net bought $17.69 billion in bond funds in the past week, reaching a new high since mid July.
As the Federal Reserve moves closer, market research firm Wolfe Research recommends investors turn to dividend growth strategies. Among the dividend themes we track, the combination of high dividend growth and high free cash flow yield performs the best and remains our most recommended theme. "The report states," Analyzing past Fed rate cut cycles, dividend growth outperforms strategies with higher dividend yields
Jiaxin Wealth Management wrote in its market outlook that the decline in Nvidia's stock price after the release of its performance did not have the expected impact on the overall market. This indicates that the long-term growth story of artificial intelligence is still intact, but it is no longer sufficient to meet high expectations. In addition, economic data helps support the bullish view that the Federal Reserve is expected to achieve a soft landing.
The institution believes that from an optimistic perspective, the data seems to indicate that the economy is healthy and the Federal Reserve is entering a loose mode. There is no need to worry about the monthly employment data for August, as the unemployment rate is expected to fall from 4.3% last month to 4.2%. On the other hand, as we enter September, the bearish seasonal characteristics cannot be ignored. Valuation indicates that all good news has been digested, and there is a lack of bullish catalysts in the short term, as the pricing of interest rate cuts has been digested. The S&P index may continue to consolidate sideways or experience a slight correction.