U.S. Markets:
Investors welcomed Federal Reserve Chair Jerome Powell's indication of impending interest rate cuts, pushing the Dow Jones Industrial Average and the S&P 500 Index closer to record levels. The market rally was broad-based, with small-cap stocks outperforming large-caps, and the equal-weighted S&P 500 Index exceeding its traditional capitalization-weighted version. Trading volume was notably low throughout the week, which was among the quietest of the summer.
Powell's speech at the Kansas City Fed's annual economic symposium in Jackson Hole, Wyoming, was a key driver of market sentiment. Stocks surged after he hinted that the time had come to adjust monetary policy, signaling potential rate cuts at the September meeting. Powell also suggested the possibility of a more substantial 50-basis-point cut, instead of the usual 25 basis points.
The release of minutes from the Fed's previous meeting further supported market optimism. A "vast majority" of participants considered a September rate cut likely, with some officials advocating for cuts as early as July, due to increasing confidence in easing inflation and a balanced labor market. However, the market's enthusiasm waned slightly following less dovish remarks from certain Fed officials, including Kansas City Fed President Jeffrey Schmid, who noted ongoing strength in the labor market and the need to continue addressing inflation.
Economic data for the week mostly met expectations. S&P Global's August economic activity estimate highlighted a continued slump in manufacturing but healthy growth in the services sector. Existing home sales saw a modest increase, ending a four-month decline. However, a significant revision of the Labor Department's payroll data revealed 818,000 fewer jobs were created over the past year than initially reported, the largest downward revision since 2009.
The downward payroll revision led to a drop in long-term bond yields, causing a rally in Treasuries. Municipal bond yields also fell, although a busy primary market seemed to dampen secondary trading volumes. Investment-grade corporate bonds performed well despite higher-than-expected issuance, while the high-yield market experienced balanced flows and lighter trading as the summer slowdown took hold.
U.S. Market Indices (as of Friday's close):
Dow Jones Industrial Average: 41,175.08 (+515.32; +9.25% YTD)
S&P 500: 5,634.61 (+80.36; +18.13% YTD)
Nasdaq Composite: 17,877.79 (+246.07; +19.10% YTD)
S&P MidCap 400: 3,096.25 (+84.87; +11.31% YTD)
Russell 2000: 2,218.70 (+76.78; +9.45% YTD)
Source: Reuters, Yahoo! Finance, Bloomberg. Data as of 4 p.m. ET.
Europe:
European stocks rose, with the STOXX Europe 600 Index up 1.31%, driven by optimism over potential rate cuts by both the Federal Reserve and the European Central Bank (ECB) next month. Germany's DAX, France's CAC 40, and Italy's FTSE MIB all saw gains, while the UK's FTSE 100 also advanced.
The eurozone's business activity picked up in August, spurred by a surge in France's services sector linked to preparations for the Paris Olympics, even as manufacturing continued to shrink. The ECB reported slower wage growth across the eurozone and noted further weakening in Germany's economy, citing low foreign demand. ECB officials from Finland and Italy indicated that the case for a September rate cut was strengthening, with some even suggesting the possibility of two more cuts this year.
In Sweden, the Riksbank lowered its key rate to 3.5% and signaled more cuts ahead, while the UK saw a robust expansion in business activity, with new orders driving the highest growth in private sector output since April.
Japan:
Japanese markets made modest gains, with the Nikkei 225 and TOPIX indices up slightly. Amid speculation that recent market volatility could deter further rate hikes, Bank of Japan (BoJ) Governor Kazuo Ueda reiterated the BoJ's commitment to normalizing monetary policy as inflation trends align with expectations. The yen strengthened against the dollar, while the 10-year Japanese government bond yield edged higher.
Despite market turbulence following the BoJ's recent rate hike, Ueda reaffirmed the central bank's stance on adjusting policy based on economic and price developments. Domestic inflation data supported the BoJ's hawkish stance, with core consumer prices rising for the third consecutive month.
China:
Chinese stocks declined as cautious sentiment ahead of Powell's Jackson Hole speech kept buyers on the sidelines. The Shanghai Composite and CSI 300 Indexes both fell, while Hong Kong's Hang Seng Index gained.
China's central bank held its benchmark lending rates steady, focusing on protecting bank profit margins. Economists expect further policy easing later this year, especially as the U.S. Federal Reserve begins cutting rates. Baidu, China's leading search engine, reported mixed earnings results, with revenue falling slightly but earnings exceeding expectations.
Other Markets:
Turkey: The central bank kept its key interest rate unchanged at 50.0%, citing a moderate inflation trend and a slowdown in domestic demand. Policymakers expressed confidence in the disinflation process, expecting it to strengthen as tight monetary conditions take effect.
Peru: Despite political instability, Peru's macroeconomic fundamentals remain strong, with stable inflation, low debt, and substantial foreign exchange reserves. However, recent populist measures by Congress, such as pension withdrawals, could pose challenges to economic stability.
Key Market Movers:
The S&P 500 and Nasdaq Composite both saw modest gains this week, with a 1.1% increase week-to-date.
U.S. manufacturing activity fell to its lowest level this year, while the services sector showed unexpected strength.
Existing home sales increased for the first time in five months, and mortgage applications dropped to their lowest level since February.
Upcoming Events:
U.S.: Initial Jobless Claims, University of Michigan Sentiment, GDP Annualized QoQ, Consumer Confidence, Durable Goods Orders, Personal Income & Spending
Global: Germany IFO Business Climate, Brazil Inflation, Hong Kong Exports, Mexico Trade Balance, France Consumer Confidence, Australia CPI YoY
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