August turned out to be a positive month for Wall Street. On Friday, indices rose and throughout the month managed to recover losses accrued due to a weak Non-Farm Payrolls (NFP) report. The Dow Jones index hit a new record, and the SP500 approached the All-Time High (ATH) level. Only Nasdaq is somewhat lower, which can be explained by the recent mild weakness of Nvidia shares.
Investors were pleased with the inflation indicator preferred by the Federal Reserve, the PCE deflator, which coincided with market consensus at 0.2 percent month-on-month and 2.5 percent year-on-year (also 2.6 percent core). This supported market hopes for a Fed interest rate cut in September, but the consumer strength revealed in the report somewhat reduced speculation about stronger action by the Federal Reserve.
After the slow NFP report on August 2, there was a strong sell-off in the stock market. Then demand was born again. The market was receiving better macro data and reassuring statements from the Fed which boosted morale and pushed back fears of a recession. A key moment was Powell’s statement at Jaskson Hole, in which the chair stated it was time to adjust monetary policy.
Yields on US bonds slightly recovered after a drop at the beginning of August, although they have been in a downward trend for several months. The dollar depreciated throughout most of last month, only the past week brought a reaction to the US currency. Today is a holiday in the USA, so attention will be focused on the European market.
In the coming days, we will receive individual components concerning the labor market. ADP, JOLT, weekly claims for allowance and also the employment subcomponent of ISM. The end of the month will be summarized by the monthly NFP report. Data from July was weak. The BLS stated outright that Hurricane Beryl made an unnoticed impact on the statistics. The market, however, speculates that it could have been different.
The rise in the unemployment rate (from 4.1 percent to 4.3 percent) was mainly due to the increase in immigration rather than company job cuts. The Sahm rule, pointing to a recession in the American economy, was notably mentioned. Statistically, this indicator has been an effective predictor of prior business downturns in the US.
We also received a revision of employment data from last year to March 2024. The size of the reduction was over 800 thousand, showing that the labor market was cooling to a larger extent at an earlier stage. Current forecasts indicate that employment in the US increased in August by 165 thousand and the unemployment rate fell to 4.2 percent.
If the data are close to expectations or better, then the chance for a 50 bp rate cut by the Fed will decrease even more, which may lead to the appreciation of the USD and an increase in yields in the debt market. The question now is how Wall Street will react. Recently, poor data was received negatively, so it can be assumed that an improvement in the situation will increase optimism and the dominance of buyers, as the vision of an economic collapse in the U.S. will be completely eliminated.
But remember, indexes in the USA but also in Europe (DAX) are in a critical position.
By Łukasz Zembik Oanda TMS Brokers
Source: https://ceo.com.pl/ten-tydzien-da-odpowiedz-na-pytanie-co-zrobi-fed-82654
