- Equities closed the best week of the year on Friday.
- This week, the focus is on the FOMC meeting minutes and Powell’s speech.
- Markets are awaiting more earnings reports from major companies like Target.
Equities rose on Monday, adding to last week’s gains as markets priced in a Fed rate cut at the September meeting. At the same time, risk appetite improved since data last week eased fears of a looming US recession.
S&P 500 weekly performance (Source: Bloomberg)
Equities closed the best week of the year on Friday, recovering from a steep sell-off two weeks ago. After an unexpected jump in the US unemployment rate, recession fears weighed on the S&P 500. However, the trend shifted when data revealed that the US economy was still strong.
After the positive data, investors shifted their outlook for Fed rate cuts. Initially, they expected a super-sized 50 bps rate cut after the poor monthly jobs report. Poor data is good for equities because it raises the likelihood of a Fed rate cut. However, when the data is so bad, it raises fears of a recession, which hurts stocks.
Nevertheless, inflation increased moderately in July, and the economy showed resilience. Notably, retail sales data revealed a surprise increase of 1.0% in July. At the same time, unemployment claims fell, indicating tight labor market conditions. Consequently, markets moved to bet on a smaller 25 bps rate cut.
Furthermore, investors’ risk appetite increased with a lower chance of a recession, so they bought more equities. This week, the focus is on the FOMC meeting minutes and Powell’s speech at the Jackson Hole symposium. The minutes will show how policymakers voted at the last meeting. Moreover, it might contain clues on the future of Fed policy.
Meanwhile, traders will pay attention to Powell’s speech to gauge his tone regarding monetary policy. Recent data on inflation has shown a consistent decline towards the 2% target. As a result, experts believe policymakers have enough confidence to signal a rate cut in September. Therefore, if Powell is more dovish, equities will climb higher. On the other hand, if he disappoints with a cautious tone, prices will likely fall.
Elsewhere, markets are awaiting more earnings reports from major companies like Target. At the start of the new quarter, reports indicated poor performance among giant tech companies. Consequently, experts downgraded earnings expectations, further fueling recession fears. More lackluster reports will weigh on equities.
