Cela's Weekly Insights - October 13, 2024

The stock market faced a rollercoaster week marked by fluctuating investor sentiment, influenced by rising Treasury yields, inflation concerns, and significant developments in the tech sector. While key indexes hit fresh record highs, the broader market faced pressure from multiple fronts, including geopolitical risks and Federal Reserve speculation. Investors found themselves grappling with mixed signals as they weighed economic data and corporate earnings reports.

Treasury Yields and Inflation Stir Market Volatility

The rise in the 10-year Treasury yield, surpassing 4% for the first time since August, created turbulence across the stock market. Higher yields often make bonds more attractive compared to stocks, prompting some investors to reassess their portfolios. The market reaction was swift, with the Dow dropping around 400 points at the start of the week, while the S&P 500 and Nasdaq also took noticeable hits.

The volatility didn’t stop there. Inflation fears were reignited when consumer prices rose slightly more than expected, with annual inflation coming in at 2.4%. Although the difference seemed small, it had a significant impact, particularly as the Federal Reserve weighs its next move. The inflation uptick followed a robust jobs report, fueling concerns that the economy might be in for a "no landing" scenario—where growth continues but inflation lingers, complicating the Fed's rate cut plans.

Adding to the uncertainty, the latest jobless claims jumped to their highest level since August 2023, further clouding the economic outlook. Traders' confidence in a November rate cut diminished rapidly as inflation and employment data painted a complex picture, with only a 17% chance that the Fed will keep rates steady, a dramatic shift from earlier projections.

Tech Sector's Bumpy Ride and Legal Challenges

The tech sector saw both bright spots and setbacks this week. Nvidia continued to shine, extending its streak of gains as excitement around artificial intelligence remained high. Nvidia's resilience was notable as the stock market faced broader pressures, showing that certain areas of the tech space are still thriving despite the macroeconomic headwinds.

However, not all tech giants fared as well. Alphabet, the parent company of Google, was hit with significant news when a judge ordered the company to open up its Google Play app store to more competition. The legal challenge rattled the sector and could have long-term implications, especially as antitrust scrutiny increases. While Alphabet’s shares recovered later in the week, the news created jitters among investors, particularly as the Department of Justice considers further action.

At the same time, the market reacted positively to Federal Reserve minutes that indicated a substantial majority of officials backed a 50 basis point interest rate cut, though some preferred a smaller reduction. The potential for a more aggressive monetary policy boosted optimism, helping tech stocks rebound after earlier losses. The sector’s bounce, driven by names like Amazon, Apple, and Alphabet, helped push major indexes higher midweek.

Earnings Season and Bank Profits Paint a Mixed Picture

As the week progressed, attention shifted to the start of earnings season, particularly the financial sector. Major Wall Street banks, including JPMorgan and Wells Fargo, reported better-than-expected third-quarter earnings, benefiting from favorable lending margins and higher tangible book values. JPMorgan led the charge, helping lift the Dow to a fresh record high by the end of the week.

Banks’ balance sheets are expanding, and as David Ellison from Hennessy Funds pointed out, they are playing a larger role in how the Federal Reserve funds government spending. This expansion could be a turning point for their profitability, especially after a challenging period.

Despite these positive earnings reports, inflation remained a concern. While wholesale inflation data came in flat, consumer inflation showed signs of persistence, leaving investors anxious about the Fed’s next move. The central bank's upcoming decisions could significantly influence market direction, especially as businesses navigate higher costs and interest rates.

All in all, the first full week of October wrapped up on a high note, but uncertainty looms large. Investors are contending with rising Treasury yields, a potential shift in Federal Reserve policy, legal challenges in the tech sector, and the impact of inflation on corporate profitability. The coming weeks will likely see further market fluctuations as economic data continues to roll in and earnings season reveals how companies are weathering the storm. With so many variables at play, volatility may remain the dominant theme for the near future.

Last Week's Market Performance: A Global Overview

Cela’s Weekly Insights Indicator

That's all for today, folks. For more insights, be sure to join me every weekday morning on my podcast, Capital Markets Quickie, where I break down the most important events in the week ahead. And if you're looking for deeper insights, subscribe to our weekly German capital markets newsletter, Die Woche IM FOKUS, from AMF Capital AG. You'll receive 6 exclusive charts and updates on the fixed income, stock market, and global economy.

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Endrit Cela The Investment Fella - ECB, mm, 411 ??