The Markets are bouncing back.
Major stock markets ended the day in the green on Friday after a rally on Thursday saw the benchmark S&P 500 and tech-heavy Nasdaq Composite erase losses suffered during this month's sell-off.
These gains helped secure the best week of the year for all of the major US indexes and the best week for stocks since November.
After rallying more than 2% on Thursday, the Nasdaq closed up about 0.2% on Friday. The S&P 500 and Dow Jones Industrial Average also each secured gains of about 0.2%.
A quiet calendar greeted us on Friday, with the main data release showing consumer sentiment ticked higher in August, rebounding for the first time in five months.
Thursday's gains were catalysed by two key readings on the US consumer, monthly retail sales and Walmart's latest earnings report, which showed any recessionary fears triggered by the sharp drop in stocks at the beginning of the month are likely misplaced.
"We've seen consistency with the consumer," Walmart's CFO said. "If you look at each month of the second quarter, they were all fairly consistent. There was no step-down in July, as some had expected. And that's generally our outlook for the year."
Consumer discretionary stocks performed well, with Starbucks surging 24.50% Tuesday on news that it was replacing its CEO with one credited with engineering a turnaround at Chipotle. Likewise, Walmart gained 6.58% on Thursday following its earnings report, which beat consensus expectations. The company also surprised analysts by raising its profit and revenue outlook for the remainder of the year.
The week’s inflation data also seemed to support sentiment. On Tuesday, the Labour Department reported that core (excluding food and energy) prices paid by producers were flat in July, ending three months of solid increases. Consumer price index (CPI) inflation, reported Wednesday, was more in line with expectations but also seemed to reassure investors. Notably, the year-over-year increase in CPI fell below 3.0% for the first time in well over three years.
Following the positive data this week investors have also now pared back some of their more dramatic bets on rate cuts from the Federal Reserve this year.
Data from the CME Group now shows investors placing 66% odds on the Fed cutting rates by 0.25% next month; odds of a 0.50% rate cut now stand at 33%. During the market's most turbulent moments last week, there was almost a near-certainty that a 0.50% cut would be warranted. We always disagreed with this as the data we were seeing simply wasn’t as bad as the market commentators were reporting. A slight downtick in the economy from high rates is to be expected, in fact is the point. As the economy slows, the Fed can start to lower rates in a controlled manner.
The next key update from investors on the rates front will come next Friday when Fed Chair Jay Powell is set to speak before the annual Jackson Hole Symposium.
The STOXX Europe 600 Index ended 2.46% higher as hopes grew for another round of interest rate cuts as early as September. Major stock indexes posted strong gains. Germany’s DAX climbed 3.38%, France’s CAC 40 Index was up 2.48%, and Italy’s FTSE MIB added 4.09%.
The eurozone economy expanded 0.3% sequentially in the second quarter, the same rate as in the first quarter. GDP growth in France, Italy, and Spain offset an unexpected contraction in Germany. Still, industrial production contracted 0.1% in June, falling short of a consensus estimate for a 0.5% increase. A purchasing managers’ survey suggested that business activity stalled in July as well. Even so, the labour market remains resilient. Eurostat data showed that employment in the second quarter expanded 0.2% sequentially.
In the UK the FTSE 100 Index rose 1.75% won the week after retail sales volumes rose 0.5% on the month in July following a 0.9% decline in June, when they were hit by bad weather and uncertainty over the general election.
Headline inflation in the UK ticked up to 2.2% in July from 2.0% in June. However, growth in services prices, a focus for policymakers, slowed more than forecast, prompting financial markets to price in a higher likelihood of interest rate cuts later this year. The economy remained strong in the three months through June. Gross domestic product (GDP) expanded 0.6%, following a solid rebound in the first quarter after last year’s ‘recession’.
Average weekly earnings growth, excluding bonuses, rose 5.4% in the three months through June, compared with the same period last year, the lowest annual increase in almost two years. Monthly retail sales volumes rebounded 0.5% sequentially in July, after a 0.9% decline in June. The data showed that sales volumes were up 1.4% versus July 2023.
In Asia Japan’s stock markets rebounded strongly over a holiday-shortened week, with the Nikkei 225 Index gaining 8.7% and the broader TOPIX Index up 7.9%. The yen weakened to the high-JPY 148 range against the U.S. dollar, from around JPY 146.6 the prior week, providing a tailwind for Japan’s exporters.
Sentiment was boosted by the US economic data, which soothed concerns about a recession in the world’s largest economy. In turn, Japan’s gross domestic product expanded by more than anticipated in the second quarter of the year, lending further support.
In the fixed-income markets, the yield on the 10-year Japanese government bond rose to 0.88%, from 0.86% at the end of the previous week. Speculation continued about the Bank of Japan’s future monetary policy trajectory, following recent comments by its deputy governor that the central bank will not raise interest rates when markets are unstable. When the BoJ raised rates in July, it sparked huge volatility that led many market participants to pare their expectations for another hike this year.
Chinese equities rose as investor sentiment was largely unaffected by weaker-than-expected economic activity. The Shanghai Composite Index gained 0.6% while the blue chip CSI 300 added 0.42%. In Hong Kong, the benchmark Hang Seng Index was up 1.99%, according to FactSet.
July data highlighted weakness in China’s economy. Industrial production rose a below-consensus 5.1% in July from a year earlier, slowing from June’s 5.3% increase, partly due to lower auto sales. Retail sales expanded a better-than-expected 2.7% in July from a year earlier, up from a 2% increase in June. Fixed asset investment rose 3.6% in the January to July period from a year ago, lagging forecasts, while property investment fell 10.2% year on year. The urban unemployment rate edged up to 5.2% from 5% the prior month.
The Week Ahead
After a positive week for the UK’s stock market, helped by healthy GDP, upticks in the US economy and some strong company results things quieten down with most in the FTSE 100 and 250 having already reported over the past month.
The mining sector might see some movement as Antofa*gasta and Thungela report their results.
Chile-focused, copper giant Antofa*gasta has already warned that annual production will be at the lower end of previous guidance due to lower grades at its monster mines of Los Pelambres and Centinela.
UK public sector net borrowing and the coming together of central bankers at Jackson Hole are set to dominate a quieter coming week of macroeconomic news.
Following inflation and retail sales figures from both sides of the Atlantic, as well as gross domestic product and unemployment data in the UK, next week will offer some insight into how central bankers view the global economic outlook.
Questions over the depth of the Federal Reserve’s September rate cut are set to be front and centre, with the reduction already priced in.
“Central bankers are finding themselves centre stage for reasons with which they may not feel entirely comfortable,” AJ Bell analysts stated, given “policy divergence” after the Bank of Japan, Bank of England and Federal Reserve have raised, cut and held rates respectively recently.
“The US Federal Reserve is facing more questions about the risk of policy error and whether it is squeezing too tightly as markets fret about gathering signs of an economic slowdown in the USA,” AJ Bell added.
Attention will therefore turn to the conference, with Fed chair Jerome Powell’s speech on Friday in focus.
Enjoy the rest of your weekend and let’s hope next week is another good one in the market for the traders at TPP.
