Bouncing back from a three-week slump, the U.S. stock market rode the wave of an artificial intelligence boom and shrugged off the volatility introduced by Nvidia’s earnings announcement and Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium. Despite the rising bond yields, the market’s resilience was on full display, setting the stage for a critical examination of the July personal consumption expenditure index and the latest monthly employment report due next week. These impending data releases will test the market’s mettle as investors grapple with the uncertainty clouding the economic outlook and evaluate whether stocks can maintain their recent gains.
Fed Chair Powell, during his much-anticipated address, signaled the central bank’s readiness to hike interest rates until policymakers are convinced that inflation is on a solid path towards the Fed’s 2% target. Yet, he conceded that there remains a degree of uncertainty regarding the necessity for more rate hikes, given that the economy may not have fully reckoned with the effects of the monetary tightening implemented over the past year and a half. This statement, coupled with next week’s economic reports, will shape the conversation around the resilience of the U.S. economy and the Fed’s potential actions at its September 19-20 policy meeting.
U.S. Stock Market Shows Resilience Amid Economic Uncertainties
Market Recovery and Rising Bond Yields Offset by AI Boom
The U.S. stock market this week bounced back from a three-week losing streak, with an earnings report from Nvidia and a speech from Federal Reserve Chair Jerome Powell at the Jackson Hole Economic Symposium causing some volatility. However, the boom in artificial intelligence offset rising bond yields.
The market will face another test next week with the release of the July personal consumption expenditure index, the Fed’s preferred measure of inflation, and the latest monthly employment report. Investors will be assessing whether stocks can maintain their recent gains in the face of uncertainties about the economic outlook.
The Fed’s Approach to Inflation
On Friday, Powell stated that the central bank stands ready to raise interest rates further until policymakers are confident that inflation is convincingly on the path towards the Fed’s 2% target. However, he admitted that they are yet unsure if more rate hikes are necessary as the economy may not have fully felt the impact of the monetary tightening over the past 18 months.
Johan Grahn, head ETF market strategist at Allianz Investment Management, likened Powell’s stance to climbing one of the Grand Tetons. He believes the Federal Open Market Committee is debating whether they have reached the "summit" in their efforts to curb inflation through interest-rate hikes and demand moderation.
The Week Ahead: Economic Data and Earnings Reports
As the second-quarter earnings reporting season wraps up, major economic data in the coming days will offer some insight into the resilience of the U.S. economy and the potential for further rate hikes by the Fed at its September 19-20 policy meeting.
Anthony Saglimbene, chief market strategist at Ameriprise Financial, notes that there will be a dearth of corporate news to move the markets, leading traders and investors to focus on the macro components. The markets will be watching the jobs market reports due out next week, including the July Job Openings and Labor Turnover Survey (JOLTS) and August ADP’s National Employment Report, followed by the Labor Department’s August nonfarm payrolls report.
The Bureau of Economic Analysis will also release its Personal Consumption Expenditures (PCE) Index, the Fed’s preferred inflation gauge, for July. U.S. inflation for July is expected to rise to 3.3% year-over-year, while consumer prices are predicted to rise a mild 0.2% for the month.
Takeaways
Despite the recent recovery, the U.S. stock market has suffered this month, with the S&P 500 losing nearly 4% so far, on course for its biggest monthly loss of 2023. However, the market’s resilience in the face of economic uncertainties and the AI boom suggest a potential for recovery.
Investors and traders will be closely watching the upcoming economic data and Fed’s actions to navigate their decisions. The market’s response to these factors will be crucial in determining its direction in the coming weeks.
