RECAPPING LAST WEEK
U.S. equity indices finished the week on a strong note, while Treasury yields and the U.S. dollar
index tumbled after Federal Reserve Chair Powell signaled that the central bank is likely ready to
resume interest rate cuts next month. The S&P500 index overcame earlier weakness caused by
retailers’ mixed earnings reports to finish marginally higher while the Nasdaq Composite fell 0.5%,
dragged down by concerns around artificial intelligence–related valuations. The Russell 2000
soared nearly 4% on Friday as smaller companies with higher debt loads may benefit from looser
Fed policy.
Economically sensitive cyclical sectors also posted solid returns for the week.
Commodities like gold and oil rose on the prospects of lower rates and a weaker dollar, while
Ethereum rocketed 9% to a new record high. In his speech at Jackson Hole, Powell said that “with
policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant
adjusting our policy stance.” Odds for a September rate cut—which had fallen below 70% before
the speech—jumped to over 90% before settling near 83%. Two–year Treasury yields slid to 3.69%
while the 10–year closed near 4.26%. Powell stated that downside risks to employment have risen
but also cautioned that the central bank must still guard against the inflationary effects from
tariffs. While not exactly dovish, the speech was less hawkish than investors had feared. He also
outlined changes to the Fed’s monetary policy framework, removing language about the pre–2021
low–rate environment and returning to flexible inflation targeting.
In other economic news, U.S. manufacturing expanded this month at its fastest rate in over three years,
with stronger demand also triggering pricing pressures. The S&P Global flash manufacturing PMI jumped to 53.3 while
services eased slightly to 55.4. U.S. housing starts and permits rose in July despite high mortgage
rates and an uncertain economy, while the growing supply of existing homes took some pressure
off home prices. Retailer Home Depot missed expectations for quarterly revenue and profit but did
not lower its future guidance. Walmart raised its sales and earnings forecast, noting that thus far,
the tariff impact has been gradual enough not to have changed customer habits. Overseas,
businesses in Germany and the wider Eurozone saw new orders increase for the first time in over
a year, pushing the flash manufacturing PMI to its highest level in more than three years. British
composite PMI surged to 53.0, but inflationary pressures returned as CPI jumped to 3.8% YoY in
July from 3.6%. Services inflation spiked to 5%YoY, likely pushing back any chance of further rate
cuts to spring 2026 at the earliest. Finally, Japan’s core CPI slowed to 3.1% YoY last month as
food prices continued to ease.
THE WEEK AHEAD
With investors seemingly more confident in the Fed’s policy path, their attention will likely turn to
the jobs and inflation data due before the next FOMC meeting. First up will be this week’s PCE
price index, set for release on Friday. Last week Powell said that he believes that inflation effects
are likely short–term, a view not necessarily shared by other members of the committee. The PCE
release will be scoured for indications either that businesses are continuing to absorb price
increases, or that they have begun passing them through to consumers. The headline inflation
number has declined recently, even as core readings and producer prices rise.
This week the second estimate of Q2 GDP arrives, along with this month’s final consumer sentiment and inflation
expectations. Other releases on the U.S. calendar include consumer confidence, new and
pending home sales, and goods trade balance figures. Last week’s wobble in technology stocks
puts an even bigger spotlight on Nvidia’s earnings report after the close on Wednesday.
On the international side, inflation updates from the Eurozone, Japan, and Australia are the main
economic releases to watch. Accelerating CPI could push the probability of a Bank of Japan rate
hike this year even higher and boost the flagging yen. Minutes from the recent central bank
meetings of Australia and Europe round out the calendar.
(Schwab)
