Tech and housing sectors keeping US stock markets on track

The US stock market experienced a rebound last week, recovering from the sharp losses of the previous week. The S&P 500, which had seen its worst decline since March 2023, regained ground, with growth stocks significantly outperforming value stocks.

This resurgence was driven primarily by strong performance in the technology sector, with NVIDIA NASDAQ:NVDA leading the charge. The company’s positive outlook on artificial intelligence at a major investment conference provided a boost in investor confidence. Traders noted a general uptick in market sentiment, spurred by a busy week of industry conferences.

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However, economic data painted a more complex picture. Core US inflation, excluding food and energy, came in slightly higher than expected, rising by 0.3% in August. This caused an initial dip in stock prices as inflation concerns mounted. Headline inflation, meanwhile, showed an annual increase of 2.5%, significantly lower than July’s 2.9%, marking the lowest level in over two years. Despite inflation fears, NVIDIA’s optimistic forecast helped reverse early market losses, allowing the broader stock market to recover.

Positive signs in US housing

In housing, some positive signs emerged as mortgage rates dipped to 6.29%, the lowest since February 2023. This was a welcome relief for potential homebuyers, as the Mortgage Bankers Association reported a rise in home loan applications, signaling some recovery in the housing market.

Treasury yields fell to their lowest levels of the year, with the 10-year Treasury note hitting year-to-date lows. Municipal bond yields remained relatively stable, despite a wave of new issuances. In corporate bonds, new issuances were sparse, but investor optimism regarding potential Federal Reserve rate cuts helped high-yield bonds perform well.

Less chance of a big Fed cut this fall

Clearly, participants appear to have reconciled themselves with the idea that the FOMC may not, in the short-run at least, deliver the magnitude of easing that some desire. That said, the ‘Fed put’ remains forceful, with 200bp of room to cut before getting to neutral, and 500bp of room to ease before the zero lower bound is reached.

Of course, this is without considering the balance sheet, with it becoming increasingly likely that quantitative tightening ends before the end of the year to avoid the balance sheet, and the fed funds rate, pulling in opposite directions.

In any case, with the Fed looming large this coming Wednesday, participants are likely to sit on their hands for now, with risk management the priority, and conviction lacking until Powell & Co’s actions are known.

US inflation indicators signal drop

Friday, though, did bring some further positive news for policymakers, as the 1-year inflation expectations component of the UMich consumer survey fell to 2.7%, it’s lowest level since the tail end of 2020. However, a rise in long-run expectations, to their highest level since last November, serves as a handy reminder that the scourge of inflation is not yet fully defeated, and that the Fed would be well-served by plotting a careful course in moving rates back to a neutral level.

These odds seem far too delicately poised for the FOMC’s liking. Policymakers have shown a distinct desire to minimise volatility over policy decisions this cycle, and said desire seems unlikely to change now, at the most delicate point in the cycle thus far. A ‘sources’ story before Wednesday’s announcement shouldn’t be ruled out, as an attempt to further massage market expectations, one way or the other.

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