Week #35 — Market Update for August 26-30, 2024

Executive Summary

US Stock Market: Major US stock indices posted mixed movements, with the S&P 500 ending the week just shy of its July peak. Meanwhile, the tech-heavy Nasdaq Composite was weighed down primarily by Nvidia, its third-largest component, whose shares dropped about 8% after its financial results. Although the earnings report met or exceeded analyst expectations in most areas, investors were disappointed by an underwhelming forecast and production issues with the upcoming Blackwell chips. Overall, the market seems to be stabilizing after the early August sell-off, with participants looking for new catalysts to drive further growth.

Cryptocurrencies: Bitcoin reversed last week’s surge, sliding below $60,000 despite the absence of any significant news. This decline highlights the fragility of the cryptocurrency market and its sensitivity to shifts in investor sentiment.

Global Stock Markets: Globally, stock markets lacked clear direction, with the global ex-US index slightly declining by 0.2%.

Earnings Season: So far, 493 companies in the S&P 500 have reported Q2 2024 earnings, with 79.3% exceeding expectations. Next week, the remaining companies from the S&P 500 Index are scheduled to present their financial results.

Monetary Policy: Market expectations for the Federal Reserve’s actions have slightly evolved. The likelihood of a jumbo-sized rate cut in September increased to 30%, up from 24% a week ago. Similarly, traders have revised their projections for 2024's monetary easing to 89 basis points, up from 83.

Bond Market: The long-term part of the US Treasury curve moved slightly upward, with 10-year bond yields increasing by 10 basis points to 3.10% and 30-year bond yields also rising by 10 basis points to 4.20%.

For comprehensive insights and a deeper understanding, readers are encouraged to refer to the full article.

US Stock Market

Major US stock market indices posted mixed movements, with the S&P 500 ending the week just within a whisker of its July maximum. Meanwhile, the tech-heavy Nasdaq Composite was pulled down primarily by its third-largest component—Nvidia—whose shares lost about 8% after reporting financial results. The earnings report, while meeting or surpassing analyst expectations on most metrics, left investors somewhat disappointed due to an underwhelming forecast and production issues with the upcoming Blackwell chips. Overall, we see stabilization after the early August sell-off, while market participants are looking for new drivers for further growth.

Bitcoin reversed last week’s surge, sliding below $60,000 in the absence of any material news. This could once again indicate how fragile the cryptocurrency market is and how sensitive it is to shifts in investors’ sentiment.

In terms of sector performance, eight out of eleven sectors showed positive dynamics. The three declining sectors were influenced by falling prices in their large positions—GOOGL, NVDA, META, and TSLA.

The Fear & Greed Index, which measures market sentiment, rose to 63 from 53 a week ago, entering the “greed" zone. In just three weeks, the index has experienced a swift comeback from "extreme fear."

The SPY ETF, which tracks the S&P 500 Index, remains in a strong uptrend but has shown little movement over the past week, with the price barely rising from 562.13 to 563.68. The ETF is consolidating just below its previous highs, with the key resistance level at 564.86. The 23.6% Fibonacci retracement level at 548.34 and the 50-day SMA provide immediate support. The RSI at 62.06 suggests that the ETF is slightly overbought, and the recent lack of momentum may indicate a need for caution as the ETF approaches resistance.

The earnings season is coming to an end. According to Refinitiv, 493 companies in the S&P 500 Index have reported earnings for Q2 2024 to date, accounting for a total of 99% of companies (up 4 percentage points over the week). Of these companies, 79.3% have exceeded analysts' expectations, down from 79.5% the previous week. This current rate is higher than the long-term average of 66.8% and in line with the four-quarter average of 79.0%.

Earnings growth projections for the quarter have been slightly revised upward. S&P 500 companies are now forecasted to see a year-on-year growth of 13.0%, and excluding the Energy sector, a growth of 13.8%. This contrasts with last week's projections of 12.7% and 13.5%, respectively.

During the week of September 2, six companies from the S&P 500 Index are scheduled to present their financial results. Among all stocks, the most eagerly awaited earnings reports include:

Global Markets

Global stock markets similarly lacked clear direction, with the global ex-US index slightly declining by 0.2%.

The ACWX ETF, representing the MSCI All Country World Index excluding the US, has shown minimal movement over the past week, closing at 55.75 on the most recent Friday, down slightly from 55.86 the previous Friday. The ETF remains in a bullish trend, with the price above all major SMAs, but the recent consolidation near the highs suggests hesitation among investors.

Economic Indicators, Statistics and News

Several important macroeconomic indicators and economic news were published during the week:

Global

US

·????? The US economy experienced stronger growth in the second quarter than initially estimated, with GDP increasing at a 3% annualized rate, up from the previous estimate of 2.8%. This upward revision was primarily driven by a stronger-than-expected rise in consumer spending, which grew by 2.9% compared to the earlier estimate of 2.3%. Key areas contributing to this growth in consumer spending included health care, housing and utilities, and recreation. However, the revision also reflected a downward adjustment in business spending, net exports, residential investment, and government outlays.

Meanwhile, orders placed with US factories for business equipment declined slightly in July, with core capital goods orders—excluding aircraft and military hardware—falling by 0.1%. This decline follows a downward revision of June's gain to 0.5%. Additionally, shipments of core capital goods, which contribute to the calculation of equipment investment in the GDP report, decreased by 0.4% at the start of the third quarter.

·????? The Federal Reserve's preferred inflation gauge, the core personal consumption expenditures (PCE) price index, rose modestly by 0.2% in July, matching expectations and indicating a continued cooling in inflation. On a three-month annualized basis, this measure advanced 1.7%, marking the slowest pace this year. This aligns with the Fed's plan to start cutting interest rates next month. Year-over-year, the core PCE index increased by 2.6%, slightly below estimates, signaling a further deceleration in inflation.

Consumer spending, adjusted for inflation, increased by 0.4% in July, with a notable rise in spending on goods, especially motor vehicles, following disruptions in sales due to a cyberattack. However, spending on services grew at a slower pace. Despite the pickup in spending, income growth was sluggish, with real disposable income showing minimal growth for the second consecutive month. The saving rate fell to 2.9%, its second-lowest level since 2008, raising concerns about the sustainability of consumer spending in the future.

·????? In August, U.S. consumer confidence showed signs of improvement, driven by optimism regarding the economy and inflation, though tempered by concerns over the labor market. The Conference Board's sentiment index rose to 103.3, marking a six-month high, with expectations for the next six months reaching a one-year peak of 82.5. However, despite the positive economic outlook, consumer confidence remains below pre-pandemic levels, influenced by the ongoing high cost of living and a softening job market. The percentage of consumers who viewed jobs as plentiful decreased to the lowest level since March 2021, while those finding jobs hard to get slightly increased. These mixed signals in the labor market are significant for the Federal Reserve as it considers potential interest rate cuts.

Similarly, the University of Michigan's consumer sentiment index edged up to 67.9 in August, its first improvement in five months, bolstered by slower inflation and the expectation of Federal Reserve rate cuts. Consumers anticipate a 2.8% rise in prices over the next year, the lowest since late 2020, although they still face challenges from elevated borrowing costs and a higher cost of living. As a result, intentions to purchase durable goods, like cars and appliances, have declined to their lowest since the end of 2022. The sentiment regarding personal finances remained subdued, with many consumers reporting financial strain.

·????? Vice President Kamala Harris’ economic plan aims to lower costs and enhance economic opportunities for lower- and middle-class Americans through measures such as tax credits and affordable prescription drugs. However, the nonpartisan Committee for a Responsible Federal Budget estimates that her proposed policies could increase deficits by $1.7 trillion over a decade, though the Harris campaign suggests these costs could be offset by higher taxes on wealthy individuals and large corporations. One key component of her plan is the extension of tax cuts for those earning less than $400,000, while increasing the corporate tax rate to 28% from the current 21%. This strategy is intended to boost U.S. revenue, although it remains expensive. The proposal to restore the expanded child tax credit, which would increase the credit to as much as $3,600 per eligible dependent, is one of the more costly initiatives, but it is praised for its potential to reduce child poverty, which had dropped to a record low of 5.2% in 2021.

Harris has also proposed a federal ban on price gouging in the food and grocery sectors, although the specifics of this plan are unclear and have been met with skepticism by some economists, who generally view price controls as harmful. On housing, Harris suggests offering up to $25,000 in down-payment assistance for first-time home buyers, alongside incentives for builders of starter homes, which could help alleviate the housing shortage but might also increase demand and push prices higher.

In health care, Harris advocates for a $2,000 annual cap on out-of-pocket prescription drug costs, a $35 monthly limit on insulin payments, and expanded subsidies for federal marketplace insurance. These measures are expected to reduce the cost of living, especially for those reliant on prescription drugs. Additionally, both Harris and former President Donald Trump propose ending federal taxes on tips, but this idea has been criticized as a gimmick that would reduce federal revenue without significantly benefiting low-income workers. Instead, economists suggest that increasing the minimum wage would be a more effective way to support hospitality workers.

·????? In June, the U.S. housing market saw a deceleration in home-price gains as potential buyers began to withdraw and listings increased. Nationally, home prices rose by 5.4% compared to the previous year, a slowdown from the 5.9% increase recorded in May, according to data from the S&P CoreLogic Case-Shiller. Despite this slowdown, home prices still demonstrated a performance above the trend when adjusted for inflation. The national index averaged 2.8% more than the consumer price index, a full percentage point higher than the 50-year average. In June, a measure of home prices in 20 major cities showed a 6.5% annual increase, down from 6.9% in May, with New York leading the a 9.0% gain, followed by San Diego and Las Vegas, with increases of 8.7% and 8.5%, respectively.

In July, the housing market faced further challenges as a gauge of pending U.S. sales of existing homes dropped to its lowest level on record. The National Association of Realtors reported a 5.5% decline in its index of contract signings, which fell to 70.2, the lowest since data collection began in 2001. This decline affected all major regions and was attributed to persistent high prices and borrowing costs, which continued to deter buyers despite positive factors like job growth and higher inventory. The high borrowing costs, which have plagued the market for nearly two years, coupled with limited inventory, kept potential buyers on the sidelines, even as mortgage rates began to decrease.

Mortgage rates in the U.S. fell for the second consecutive week, with the average rate for a 30-year fixed loan dropping to 6.35%, the lowest since May 2023. This decline, however, may not continue significantly throughout the year, as the market has already priced in anticipated Federal Reserve cuts for later in the year. Economists like Ralph McLaughlin from Realtor.com predict that mortgage rates will stabilize around 6.3% by the end of 2024, barring any significant negative economic indicators. The housing market has struggled with low inventory, and while listings have been gradually increasing, the pace of this growth has recently slowed, particularly in the four weeks leading up to August 25, where the total number of homes for sale saw the smallest increase in five months, according to Redfin.

·????? The New York Fed Staff Nowcast model upgraded its US GDP growth forecast for Q3 2024 to 2.49% from 1.94% a week ago, following positive surprises in personal consumption and manufacturing data. Similarly, the Atlanta Fed's GDPNow revised its estimate upward to 2.5% from 2.0%.

Europe

·????? Euro-area economic confidence improved slightly for the second consecutive month in August, with a sentiment indicator rising to 96.6 from 96 in July, surpassing analysts' expectations. The uptick was driven by gains in industrial and services confidence, although consumer sentiment declined. This improvement comes amid concerns over weakening economic expansion in the 20-nation currency bloc, particularly due to Germany's unexpected economic contraction in the second quarter. While the Paris Olympics provided a temporary boost, underlying private sector activity remains under pressure.

·????? Euro-area inflation dropped to its lowest level since mid-2021 in August, with consumer prices rising by 2.2% year-on-year, down from 2.6% in July. Core inflation, which excludes food and energy, also eased slightly to 2.8%. Despite these positive indicators, services inflation, driven by rising wages, increased to 4.2%, which could complicate the ECB’s monetary policy decisions.

In Germany, inflation fell to the ECB's 2% target in August, down from 2.6% in July. This unexpected drop, largely due to lower energy prices and favorable base effects, supports the argument for further rate cuts by the ECB. However, with core inflation in Germany still above 3% and services inflation exceeding 4%, the ECB is likely to proceed cautiously with a gradual reduction in rates.

French inflation also eased to 2.2% in August, from 2.7% in July, marking its lowest level since July 2021. This decline strengthens the case for continued interest rate cuts by the ECB, though services inflation in France rose to 3.1%, signaling potential challenges ahead. The overall easing of inflation provides some relief to President Emmanuel Macron, who has faced political pressure to address the rising cost of living.

In Spain, inflation fell to a one-year low of 2.4% in August, down from 2.5% in July. This marks the third consecutive monthly slowdown, driven by lower fuel and food costs. However, underlying inflation, which excludes energy and some food prices, moderated to 2.7%. While the current trend aligns with the ECB's inflation target, economists expect inflation to edge up again towards the end of the year due to rising energy costs and the reversal of tax cuts.

·????? Germany's economic outlook has dimmed as recent data reveals persistent challenges in the country's growth trajectory. The economy contracted by 0.1% in the second quarter, driven by a significant 2.2% drop in capital investment and a 0.2% decline in private consumption, while government spending increased by 1%. This decline underscores the difficulties faced by Germany's industrial sector, which has been hampered by subdued foreign demand, high borrowing costs, and political uncertainty. The Bundesbank, however, does not anticipate a severe recession, expecting a slight increase in output in the third quarter, though acknowledging that the economic recovery will be delayed.

Business sentiment remains bleak, with the Ifo institute's expectations gauge dipping to 86.8 in August, marking the lowest level since February. This reflects a growing pessimism among both manufacturers and service providers. The anticipated rebound in consumer spending and industrial activity has yet to materialize, and the outlook for a robust recovery in 2024 appears increasingly doubtful. Ifo President Clemens Fuest highlighted the need for stronger investment incentives, structural reforms, and more expansionary fiscal and monetary policies to boost confidence among consumers and investors.

German consumer sentiment is also deteriorating, as shown by the GfK consumer climate index, which fell to -22.0 points for September from -18.6 in August. Rising unemployment, job cuts, and increasing corporate insolvencies have contributed to a sharp decline in income expectations, dropping from 19.7 to 3.5 points. This decline in consumer confidence is further evidenced by the drop in the willingness to buy indicator, signaling a growing reluctance among consumers to make major purchases. As economic conditions worsen, hopes for a sustainable recovery driven by private consumption are being pushed further into the future.

Asia

·????? In August, inflation in Tokyo accelerated, with consumer prices excluding fresh food rising by 2.4%, up from 2.2% in July. This exceeded the consensus estimate of 2.2%, supporting the case for the BOJ to continue its gradual rate hikes. Governor Kazuo Ueda has early indicated a willingness to raise rates further if price trends align with the bank’s projections, though he remains cautious, weighing the impact of volatile financial markets and the need to support the economy’s slow recovery.

Inflation was notably driven by rising energy prices, with electricity costs jumping by 24.2% in August, up from 19.7% in July. Additionally, prices for household durable goods and services also saw slight increases, with the service price gauge rising to 0.7% in August from 0.5% in July.

Additional data showed that Japan's jobless rate slightly increased to 2.7%, while the jobs-to-applicants ratio improved to 1.24. Factory output grew by 2.8% in July, though this was below the expected 3.5% increase, and retail sales growth slowed to 2.6% year on year, just barely outpacing inflation. These indicators suggest that while the economy is recovering, it is doing so at a sluggish pace.

·????? China’s economy continues to show signs of strain, with factory activity contracting for the fourth consecutive month in August. The official manufacturing PMI dropped to 49.1, down from 49.4 in July, indicating ongoing challenges in the world’s second-largest economy as the index remains below the 50-point threshold that separates growth from contraction. This prolonged weakness in manufacturing is raising concerns about China’s ability to meet its economic growth target for the year. Contributing factors include high temperatures, heavy rainfall, and seasonal production slowdowns, according to the National Bureau of Statistics. On the other hand, the non-manufacturing PMI, which covers the construction and services sectors, saw a slight improvement, rising to 50.3 from 50.2 in July, thanks to increased consumption during the summer holidays.

However, overall economic momentum remains fragile, prompting economists to lower their growth forecasts for the coming quarters. The median GDP growth forecast for the third and fourth quarters has been reduced to 4.6% year-on-year, down from 4.7%. Retail sales expectations have also been downgraded, now predicted to rise just 4% for the year, reflecting diminished consumer spending prospects.

In contrast, China’s industrial companies posted their fastest profit growth in five months in July, with a 4.1% year-on-year increase. This marks a slight improvement from June’s 3.6% gain, with total profits for the first seven months of 2024 reaching 4.099 trillion yuan ($575 billion). The growth in industrial profits has been supported by strong earnings in high-tech manufacturing and stable performance in the equipment manufacturing sector, which together account for a significant portion of total industrial profits. However, weak domestic demand continues to cast doubt on the sustainability of this resilience, especially as export growth unexpectedly slowed in July.

·????? India's economic growth slowed to 6.7% year-on-year in the April-June quarter, reflecting a decline in government spending during the national elections. This growth rate, while below the 6.9% forecast by a Reuters poll and down from 7.8% in the previous quarter, still positioned India as the world's fastest-growing major economy, outpacing China's 4.7% growth in the same period. Economists expect this slowdown to be temporary, with projections of a recovery driven by easing inflation and a pickup in government expenditure.

The Gross Value Added (GVA), which many economists consider a more stable indicator of economic growth, increased by 6.8% during the quarter, up from 6.3% in the previous quarter. Consumer spending, which makes up about 60% of India's GDP, saw a significant rise, reaching a seven-quarter high of 7.4%, compared to 4% in the previous quarter. Capital investments also grew by 7.4%, slightly up from 6.5% in the prior quarter. However, government spending contracted by 0.2%, a reversal from the 0.9% increase seen in the previous quarter.

Manufacturing, which accounts for approximately 17% of GDP, expanded by 7%, though this was a deceleration from the 8.9% growth in the prior quarter. Agricultural output improved, growing by 2%, up from 1.1% in the previous quarter, with expectations of a further boost due to favorable rainfall patterns.

Despite these positive indicators, India continues to face challenges in job creation and ensuring more inclusive economic growth, which have impacted real wages and household consumption among lower-income groups. The government's $576 billion annual budget, which includes significant allocations for infrastructure, affordable housing, and rural employment, is expected to remain a crucial driver of economic activity. Additionally, with retail inflation easing, there is potential for the central bank to cut its policy rate later in the year, which could further stimulate household consumption and private investment.

Foreign Exchange Markets

The Dollar Index, which reflects the value of the US dollar against a basket of major currencies, increased by 1.0%.

Commodities and Energy Markets

In the commodities sector, most assets ended the week with mixed movements.

Debt and Fixed Income Markets

Market Movements

According to CME data, the implied Fed Funds rate curve for the next 18 months (until February 2026) has barely changed.

Meanwhile, the long-term part of the US Treasury curve has moved slightly upward, with 10-year bond yields increasing by 10 basis points to 3.1% and 30-year bond yields also increasing by 10 basis points to 4.20%.

Central Bank Insights

·????? The Bank of Japan is maintaining a cautious yet open stance on further interest rate hikes, according to recent remarks by Deputy Governor Ryozo Himino. Despite recent turbulence in financial markets, Himino indicated that the BOJ would proceed with raising rates if inflation trends align with the bank's expectations. This approach signals that the BOJ's fundamental strategy remains unchanged even after the market disruptions that followed its unexpected rate hike on July 31.

Himino emphasized that the BOJ is carefully monitoring the financial markets, given their current instability, which could impact the bank's inflation outlook. He acknowledged the importance of staying vigilant and responsive to market developments both domestically and internationally. Although Himino's remarks suggest that another rate hike is likely, possibly by January, he also conveyed that such a move is not imminent, as the central bank is prioritizing stability and closely observing the evolving economic conditions.

·????? The European Central Bank is navigating a complex monetary policy landscape, with various policymakers expressing a range of views on the appropriate pace and timing of interest rate cuts amid persistent inflationary pressures and concerns over economic growth.

Klaas Knot, a member of the ECB Governing Council, criticized the "inappropriate fiscal stance" that has hindered the effectiveness of the ECB's monetary policy in controlling inflation. He emphasized that fiscal policy has remained too loose, placing the burden of reducing inflation predominantly on the ECB. Knot argued that a more restrictive fiscal approach would have been beneficial, and he highlighted the need for national fiscal policies to align more closely with European Union spending, as they ultimately impact the same taxpayers.

Christodoulos Patsalides, another ECB Governing Council member, suggested that if current economic forecasts hold, there is room for further cuts in borrowing costs. Patsalides pointed to the success of the ECB's policies in reducing inflation and noted that future rate cuts would depend on data continuing to align with the ECB’s projections.

Philip Lane, the ECB’s Chief Economist, acknowledged the progress made in reducing inflation towards the 2% target but cautioned that the goal is not yet secure. Lane stressed the need for monetary policy to remain restrictive to ensure inflation returns to target by the end of 2025. He also warned against maintaining overly tight policy for too long, which could harm economic growth and labor markets. Lane highlighted that wage growth, a key inflation driver, is expected to slow significantly by 2025 and 2026, which should help stabilize inflation.

Joachim Nagel, head of the Bundesbank, and Isabel Schnabel, an ECB Executive Board member, both expressed caution against reducing interest rates too quickly. Nagel warned that inflation might temporarily dip to target levels but is likely to rise again, particularly due to persistent services sector inflation. Schnabel echoed these concerns, emphasizing that while headline inflation is declining, domestic inflation remains high, especially in the services sector. Both officials underscored the importance of a gradual and cautious approach to policy easing.

Meanwhile, Madis Muller of Estonia indicated increasing confidence that the ECB will lower rates at its September meeting, driven by data showing slowing wage growth and inflation. However, he also noted that the extent of future cuts remains uncertain and dependent on continued favorable economic data.

Francois Villeroy de Galhau, the Governor of the Bank of France, supported a rate cut in September, citing significant progress in curbing inflation. He argued that the ECB should anticipate further reductions in price pressures and be mindful of the risk of insufficient economic growth, which could push inflation below target. Villeroy advocated for a pragmatic approach, balancing observed inflation with expectations and forecasts.

Overall, the ECB appears poised to continue its path of cautious rate cuts, with policymakers emphasizing the need to carefully monitor data and ensure that inflation is sustainably reduced without jeopardizing economic growth.

·????? The recent comments from various Federal Reserve officials suggest a cautious yet increasingly favorable stance toward cutting interest rates in the near future.

Federal Reserve Bank of San Francisco President Mary Daly expressed that the time for policy adjustment has arrived, emphasizing the need to avoid overly restrictive monetary policy that could harm the labor market. She highlighted that although the labor market has shown some signs of weakening, inflation pressures have eased sufficiently to justify considering rate cuts, though the exact pace and timing remain undecided.

At the Economic Symposium in Jackson Hole, Richmond Fed President Thomas Barkin shared insights into the ongoing discussions among central bankers, underscoring a balanced approach to managing inflation and employment risks. Barkin noted that while inflation has moderated and the labor market has loosened slightly, there remains a cautious outlook, advocating for a "test-and-learn" approach to policy adjustments. This method involves gradual and deliberate rate cuts to avoid overreacting to the current economic environment.

Atlanta Fed President Raphael Bostic also indicated that it might be time to consider rate cuts, though he remains cautious, emphasizing the importance of avoiding a scenario where rates are cut only to be raised again. Bostic's earlier stance of supporting just one rate cut by the end of 2024 has shifted, with upcoming data on inflation and employment being critical in determining the next steps.

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