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Looking at last week’s market close, it is hard to believe that everyone was talking about an impending recession and imminent collapse at the beginning of the month.
A couple of positive macro reports were all it took for optimism to pick up: the three major US indices – the Nasdaq Composite, the Dow Jones, and the S&P 500 – had their best week of the year.
What boosted investor confidence were three key factors:
- U.S. CPI fell to 2.9% y-o-y in July from 3% in June, while core inflation rose to 3.2% from 3.3%.
- Retail sales rose 1% m-o-m in July, well above the forecast of 0.4%.
- The University of Michigan’s consumer confidence index rose from 66.4 to 67.8 in August.
These data suggest that inflation is slowing while the economy remains strong. So, while the Fed may not be in a hurry to cut interest rates, it should not be a significant concern.
But is everything as rosy as it seems?
Although the current trend is upward, analysts warn that, historically, significant market declines tend to occur shortly after the Federal Reserve begins cutting interest rates. Therefore, caution is warranted.
With the Fed possibly signaling a shift in monetary policy as soon as September, most indices based on this pattern could be nearing a peak. Whether or not this plays out remains to be seen.
For now, investors will be closely watching Jerome Powell’s speech at the Jackson Hole symposium for clues on the outlook for the regulator’s long-awaited announcement of tapering.
Regarding risks, it’s essential to watch the USD to JPY rate. Yen’s strengthening could again impact the carry trade, leading to increased market volatility or, worse, discouraging risk among investors.
Finally, any worsening of geopolitical conditions could negatively affect market sentiment.
