Mike Dolan’s analysis highlights a buoyant sentiment in U.S. and global markets as investors anticipate the Federal Reserve’s next moves amidst mixed economic signals. Here’s a detailed look at the current situation and what to expect in the coming days:
U.S. Economic Outlook
Economic Performance and Fed Expectations:
The U.S. economy appears robust, with recent data supporting a positive outlook. Thursday’s economic updates painted a picture of resilience: American consumers remain optimistic, evidenced by Walmart raising its forecasts, and jobless claims falling. Despite these positive signs, there are still areas of concern, particularly in manufacturing and housing sectors. However, as inflation returns to target levels, this allows the Federal Reserve to consider easing its monetary policy.
Growth Estimates:
The Atlanta Fed’s ‘GDPNow’ real-time estimate for the current quarter has been revised down to 2.4% from 2.9%. This adjustment reflects a cooler growth forecast but doesn’t overshadow the overall positive sentiment. U.S. and global economic surprise indexes are still negative, suggesting some caution among investors. Despite these indicators, recession fears are subdued, and market expectations are leaning towards a quarter-point rate cut by the Fed next month.
Rate Cut Speculations:
The debate about the scale of the Federal Reserve’s rate cut—whether a quarter-point or half-point—is settling in favor of a more modest adjustment. Futures markets are pricing in a 30 basis point cut for September and an additional 61 basis points for the remainder of the year. This is a significant reduction from the more than 100 basis points of cuts previously anticipated for 2024.
Upcoming Events:
The Fed’s Jackson Hole symposium next week will be a key event for insights into the central bank’s thinking. Fed Chair Jerome Powell’s speech at the symposium will be closely watched. Additionally, Nvidia’s earnings report on August 28 will provide insight into the artificial intelligence sector, which has been a major market driver.
Market Reactions
Stock Market Trends:
U.S. equities have responded positively to the shifting Fed expectations. The S&P 500 is on track to record its best week of the year with gains of nearly 4% following a strong rally on Thursday. This upbeat performance is reflected in the futures markets, where S&P 500 futures are trading higher.
Treasuries and Dollar:
Treasury yields have adjusted to the changing Fed expectations. Two-year yields have risen back above 4% and remain there, reflecting the market’s recalibration. The dollar index has strengthened in response, maintaining its firm stance.
Global Markets:
Globally, market sentiment is also positive. Japan’s Nikkei has surged more than 3% on Friday, marking a notable recovery from earlier volatility related to yen fluctuations. This rebound is supported by a strong second-quarter GDP report and a slight easing of the yen.
European and Chinese Markets:
European stocks are on track for their best week in three months, buoyed by Wall Street’s momentum and a slight improvement in economic conditions despite ongoing challenges from China’s economic slowdown. In China, stocks have also firmed up following supportive comments from the central bank regarding monetary policy.
Currency and Company News
Currency Movements:
The British pound has strengthened following data showing a 0.5% rebound in retail sales for July, aligning with expectations. This reflects a positive trend for the UK economy amidst broader global market dynamics.
Company Updates:
In corporate news, Applied Materials forecasted slightly higher fourth-quarter revenue, driven by expected growth in AI-related demand for its chip-making equipment. However, despite closing 5% higher on Thursday, Applied Materials’ shares fell 2.8% in extended trading, reflecting some caution from investors.
Key Developments to Watch
U.S. Economic Reports:
Later on Friday, the U.S. will release July housing starts and permits data, as well as the University of Michigan’s August household survey. These reports will provide further insights into the housing market and consumer sentiment.
Federal Reserve and Corporate Earnings:
Chicago Federal Reserve President Austan Goolsbee will speak, potentially offering more clues about the Fed’s policy direction. Additionally, Campbell Soup will report its earnings, providing further insights into the consumer goods sector.
Overall, while the U.S. economy shows resilience and positive market reactions, investors should stay attuned to upcoming economic data and central bank developments for a clearer picture of future market movements.