Market Monitor: August Mid-Month Update
Headlines and Highlights
- Cooling inflation solidifies case for September rate cut: Inflation fell below 3% for the first time since 2021, strengthening expectations that the Federal Reserve will finally lower its benchmark interest rate from a more than two-decade high at its next meeting on September 18th. The consumer price index fell to 2.9% on an annualized basis after a modest 0.2% rise in July. Excluding food and energy, core CPI ticked down to 3.2%, also the lowest since early 2021. Housing (shelter) costs were responsible for 90% of the inflation rise.
- Markets rebound after sell-off: Global stocks bounced back after a steep drop rooted in worries about the U.S. economy. The S&P 500 plunged as much as 7% in the first week of August, including its biggest one-day drop (3%) in two years, before erasing the loss and turning positive for August (+0.1%) by mid-month. Small caps and international stocks fell even more before recovering to reduce their monthly declines to 5.3% and 0.6%, respectively. The market downturn occurred after reports showed a cutback in hiring and a jump in unemployment to 4.3%, heightening concerns about the Fed’s decision to forgo a rate cut on July 31st.
- Retail sales, labor market data allay recession fears: U.S. retail sales rose 1.1% last month and jobless claims fell over the past two weeks among new reports testifying to the economy’s resilience. The July retail sales rise reversed a June slowdown and was the largest monthly jump in the last year, showing robust spending continuing even as consumer sentiment as measured by the University of Michigan sagged to an eight-month low last month before inching higher in early August. The U.S. economy is expanding at an estimated 2.0% pace in the third quarter, according to the Atlanta Fed.
Chart of Interest
Sales surge: Americans accelerated their spending last month, reflecting a solid economy.
Sources: Federal Reserve Bank of St. Louis, Altair Advisers
Key Takeaways
- The S&P 500 is back to within 2.2% of its all-time high set on July 16th after falling nearly 10% below it earlier this month. The index was up 16.2% for 2024 through August 15th.
- The global market sell-off was exacerbated by the Bank of Japan’s first interest-rate hike in 17 years, intended to halt the yen’s slide against the U.S. dollar. Coupled with imminent rate cuts in the United States and elsewhere, the move further upended markets by prompting many institutional investors to unwind the hugely popular “yen carry trade.” That trade involves borrowing the yen and using it to buy the dollar or other currencies with much higher yields.
- Bonds provided shelter and showed the power of diversification during the sell-off in stocks. The Vanguard Total Bond Index, a proxy for U.S. investment-grade bonds, rose 1.5% during the period of sharp volatility and reached mid-month up 3.1% for the year. Altair’s municipal bonds index also advanced and was up close to 2% for 2024.
- The consensus of Wall Street is for interest-rate cuts totaling a percentage point or more by year-end, lowering the benchmark lending rate to 4.25% or below. We continue to believe the central bank will not reduce rates that aggressively given the economy’s resilience.
- Europe’s economic growth was a tepid 0.3% in the second quarter due to a slump in Germany and more frugal spending than in the U.S., the result of consumers’ focus on saving and governments’ cutbacks to reduce budget deficits. Germany’s economy, Europe’s largest, unexpectedly shrank 0.1% from the prior quarter as the country’s industrial sector weakened under pressure from rising interest rates. Lackluster growth in the eurozone is a step forward from last year’s contraction and the International Monetary Fund recently upgraded its GDP estimate for the region, now projecting 0.9% growth in 2024 and 1.5% in 2025.
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