Cela's Weekly Insights - September 29, 2024

After months of cautious optimism, the U.S. Federal Reserve has become the focal point for both investors and economists, as recent market activity reflects a growing anticipation of a potential “soft landing” for the economy. Over the past week, several key economic indicators have surfaced, shedding light on inflation, employment, and overall economic health. Against this backdrop, investors are eager to interpret the Fed's next move in response to these developments, with the stock market reacting to each new piece of data.

Inflation Cooling, But the Fed Isn't Done

One of the most anticipated updates was the release of the Personal Consumption Expenditures (PCE) price index, the Fed’s preferred inflation gauge. August's reading showed a modest 0.1% rise in core PCE, a number that suggests inflation is slowing more quickly than expected. This has investors hopeful that the Fed's aggressive rate hikes may have finally tamed inflation without plunging the economy into recession. The data also supported the notion that the Fed might have room for further rate cuts this year, fueling optimism that a "soft landing"—where inflation cools but economic growth remains steady—is within reach.

However, Fed officials, including Atlanta Fed President Raphael Bostic and Chicago Fed President Austan Goolsbee, have indicated that while inflation is indeed cooling, there is still some debate on whether the current economic trajectory warrants further aggressive cuts. Investors are paying close attention to Fed Governor Michelle Bowman, who dissented from the last rate cut, citing lingering concerns over inflation's long-term trajectory. With Fed Chair Jerome Powell speaking at the U.S. Treasury Market Conference this week, his insights could clarify the path forward for interest rates.

Markets Respond to Economic Data and Fed Signals

Despite inflation concerns, markets have largely responded positively to economic data. Major indices, including the Dow Jones Industrial Average and the Standard and Poor’s 500, repeatedly hit record highs throughout the week. This performance is partly driven by optimism surrounding the Fed’s potential to ease rates further, but it’s also supported by stronger-than-expected economic data, such as the second-quarter GDP report, which showed stronger growth than anticipated. Weekly jobless claims also hit a four-month low, adding to the upbeat sentiment.

The markets did experience some volatility, with the Standard and Poor’s 500 and Nasdaq seeing slight declines at points during the week. However, these dips were mostly seen as short-term reactions to fluctuating investor sentiment rather than signs of a deeper market downturn. Tech stocks, particularly in the semiconductor space, enjoyed significant gains, led by companies like Micron, which benefited from strong earnings reports and bullish outlooks from Wall Street analysts.

Global Impact: China’s Stimulus and European Struggles

Globally, markets were influenced by external factors, particularly developments in China. Beijing rolled out its most substantial economic stimulus package since the pandemic, aimed at boosting the country’s sluggish economy and addressing its ongoing property crisis. The move sparked a rally in Chinese stocks, with the CSI 300 index experiencing its best week in a decade. U.S.-listed Chinese companies, including JD.com, also saw significant stock price jumps, adding a global boost to U.S. markets.

However, not all global regions fared as well. The Eurozone’s economy as well as Germany’s economy continue to show signs of strain, with business activity dipping further into contraction territory. Sentiment across the continent is mixed, particularly as inflation and political concerns persist. This global economic divergence adds another layer of uncertainty to the U.S. markets, especially as investors weigh the strength of the U.S. economy against weaknesses in other major economies.

What’s Next for the Markets?

Looking ahead, investors will continue to watch inflation data and Fed signals closely. The PCE index has provided some optimism, but there is still debate about whether another rate cut is warranted before the end of the year. As of now, more than half of traders are betting on a 50-basis point cut at the next Fed meeting, but much depends on upcoming economic reports.

Meanwhile, the housing market has shown signs of both strength and weakness. New home sales dipped in August, a result of high mortgage rates and rising home prices, but mortgage applications jumped as homeowners rushed to refinance amid falling rates. This dichotomy underscores the ongoing challenges in the housing sector, as the Fed’s rate policies continue to ripple through various segments of the economy.

All in all, the market’s performance in recent weeks reflects a mix of cautious optimism and underlying concerns. While inflation is cooling, and economic data remains mostly positive, the Fed's next steps will be crucial in determining whether the U.S. economy can truly achieve a soft landing. Investors will be keenly awaiting more data and Fed statements to confirm that the path forward remains clear.

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.

Cheerio!

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