- AI optimism returned on Monday, with US chip stocks gaining.
- Data released on Friday showed a significant increase in US employment.
- Estimates show that US price pressures increased by 4.2% annually.
Equities briefly recovered on Monday as the tech sector propelled the S&P 500 higher. However, it was not enough to retrace Friday’s collapse after an upbeat jobs report. Market participants are now looking forward to the crucial US CPI report that is due on Wednesday.
The stock market has performed brilliantly in recent months despite tensions in the Middle East and a lack of risk appetite. The S&P 500 has recorded all-time highs amid optimism in the tech sector. Tech companies performed better than expected in the first quarter, giving investors the confidence to stay long and keep buying.
However, last week the tech sector saw some dips amid uncertainty in global markets. An escalation in the Middle East war hurt risk sentiment and left traders uncertain about the future. Strikes between the US and Iran and Israel and Lebanon dashed hopes for peace and a reopening of the Strait of Hormuz. As a result, oil prices rose, and inflation worries worsened.
Nevertheless, some of that tech and AI optimism returned on Monday with US chip stocks gaining. Still, all other fundamentals pointed to further downside for stocks.
Data released on Friday showed a significant increase in US employment. Employers hired 172,000 new workers, above the 85,000 estimate. Meanwhile, the unemployment rate held steady at 4.3%.
US 2-Year yields (Source: Bloomberg)
The upbeat report painted a picture of robust labor-sector growth. The Fed keeps a close eye on this sector as it shows whether the economy is overheating. After the data, traders increased the likelihood of a December rate hike to 70%, up from 45% the previous week; as a result, yields gained.
The Fed is facing a lot of pressure to tighten monetary policy and cool down the economy. Higher borrowing costs will make it harder for businesses to grow. Therefore, this would be bearish for equities.
On Wednesday, the US will release its pivotal consumer inflation report. Estimates show that price pressures increased by 4.2% annually. It shows economists are expecting a significant increase from the previous reading of 3.8%. A hotter-than-expected number would increase bets for a December Fed rate hike, further weighing on the equities market.
