S&P Delivers 2024’s Highest Return

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In this publication:

• CPI & retail sales crush recession fears

• Only 25% chance for 2 rate cuts in September

• NZ & Australia diverge—FX traders, take note

• S&P posts best weekly gain since Oct 2022

• Gold hits record highs

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: Underlying inflation slowed for the fourth consecutive month in July, with the core consumer price index (CPI), excluding food and energy, rising 3.2% year-over-year—the slowest increase since early 2021. On a monthly basis, it edged up 0.2%, slightly higher than June's unexpectedly low reading. The overall CPI in July increased 2.9% from the same month a year earlier while the Producer Price Index rose 2.2%. This ongoing deceleration strengthens the case for a rate cut, with the Fed now likely to shift its focus to labor market conditions, a central theme at their upcoming symposium in Jackson Hole, Wyoming, which will be held on August 22-24

• Retail sales in July jumped by 1%, far exceeding the expected 0.4% increase, while new unemployment claims unexpectedly fell, signaling a resilient consumer sector and labor market. Another encouraging sign emerged later on Thursday, with new claims for unemployment benefits decreasing compared to the previous week.

• U.S. Treasury yields rose, with the 10-year note reaching 3.93% on Friday, fueled by strong economic data that diminished the likelihood of preemptive Fed rate cuts. Market pricing now reflects just a 25% chance of a 50-basis-point Fed rate cut next month, a significant shift from last week when expectations were evenly divided between one or two cuts. This change was mainly driven by July's U.S. inflation and retails sales report. The volatility underscores the market's tendency to overreact to economic data, while also pointing to deeper concerns about the Fed's ability to avoid a recession. The next Federal Reserve interest rate decision is set for September 18. In total, markets currently price in three to four quarter-point cuts this year from the current rate range of 5.25% to 5.5%.

• New Zealand: The central bank has cut the Official Cash Rate by 0.25 percentage points to 5.25%, initiating an easing cycle earlier than anticipated due to economic downturn and slowing inflation. The Reserve Bank of New Zealand (RBNZ) now forecasts further reductions, with the OCR expected to drop by around 100 basis points by mid-next year. This shift is a significant departure from its May stance, when it indicated rate hikes and no cuts until the second half of 2025. The unexpected economic contraction has necessitated further easing to boost demand and manage unemployment.

• As most central banks globally consider lowering rates, the Reserve Bank of Australia (RBA) is increasingly becoming an outlier. RBA Governor Michele Bullock stated on Friday that it is premature to discuss rate cuts, emphasizing that underlying inflation remains too high and that the board is focused on potential upward risks to prices. With the RBNZ cutting rates and the RBA adopting a more hawkish stance, we expect the AUD to appreciate against the NZD over the next few months. This presents a favorable opportunity for FX traders to exploit.

Equity Markets

• A wave of strong economic data has pushed stocks to their best week this year, as investors jumped in after a recent slump. The S&P 500 rose on Friday, capping a 3.8% gain over the last week—the best streak since October 2022. This rally broke a four-week losing trend, which had been fueled by worries that the Federal Reserve might not lower interest rates quickly enough to prevent slowing economic momentum.

• The Nasdaq surged by 5%, outperforming other indices. Information technology stocks, which had dragged down the broader market in the previous week's sell-off, led the recent gains. The tech sector's 7.6% average increase significantly contributed to the Nasdaq's strong performance, as it has a higher weighting in tech compared to the S&P 500 and the Dow.

Commodity Markets

• Oil: Oil prices remained largely unchanged week on week, with Brent crude benchmarks dropping by 10%. Despite increasing global oil demand, the market is still oversupplied, largely due to weak consumption in China. However, strong demand in the U.S. is mitigating these issues; U.S. total oil consumption reached 20.8 million barrels per day in May, the highest for that month on record. Overall, global oil consumption this year is expected to exceed last year’s levels by at least a million barrels per day, aligning with the average growth observed over recent decades.

• Gold: Gold futures reached new record levels for the third consecutive week, surpassing $2,500 per ounce on Friday. The price, around $2,545 in the afternoon, was up over 20% year-to-date.

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