S&P 500: +0.24% DOW: +0.94% NASDAQ:-0.94% 10-YR Yield: 3.91%
What Happened?
U.S. stock indexes rallied late on Friday, closing a volatile August on a high note with monthly gains. August began with sharp declines due to growth fears and the unwinding of crowded trades, but markets rebounded as investors regained confidence in the “soft landing” narrative, buoyed by resilient U.S. growth and easing inflation pressures. Personal spending rose 0.5% in July, and the Fed’s preferred inflation gauge, the PCE price index, met expectations at 2.5%, prompting traders to temper expectations for aggressive rate cuts. The S&P 500, Nasdaq, and Dow all posted gains for the month, supported by resilient economic data. Treasury yields ticked higher, and European markets reached new highs as eurozone inflation slowed.
Sector performance this month was led by utilities (+6.2%), consumer staples (+5.8%), and real estate (+5.5%) which all saw significant gains, benefiting from a rotation into defensive areas amid ongoing economic uncertainty. Consumer staples had its best month since November 2022, lifted by strong performances from stocks like Costco, Coca-Cola, and General Mills. Real estate also posted solid gains, driven by strong earnings in key companies such as Mid-America Apartment Communities and Public Storage. Meanwhile, the technology sector continued to perform well, though some mega-cap names like Nvidia saw a pullback despite strong earnings due to concerns over slowing revenue growth. Investors now turn their attention to key economic data next week, including the jobs report, which will be pivotal in shaping expectations for the Fed’s upcoming rate decisions.
Fed’s Favorite Inflation Indicator Increased 0.2% in July, as Expected
- Core personal consumption expenditures prices increased 0.2% in July and 2.6% from a year ago. The 12-month figure was slightly softer than the 2.7% estimate.
- All-item inflation came in respectively at 0.2% and 2.5%, in line with forecasts.
- Personal income increased 0.3%, slightly higher than the 0.2% estimate, while consumer spending rose 0.5%, in line with the forecast.
The key takeaway – The latest U.S. inflation data, showing the PCE index rising 2.5% year-over-year in July and the core index up 2.6%, supports forecasts for moderate interest rate cuts starting next month, contingent on stable employment and sustained consumer spending. The inflation readings, which met expectations, showed no acceleration, easing concerns about persistent services inflation. Fed Chair Jerome Powell has expressed more concern about weakening labor markets than inflation, prompting most investors to anticipate a gradual 25-basis point rate cut in September. Labor data, particularly the upcoming August nonfarm payrolls, will be crucial in confirming whether job market softness persists. While real disposable income is still growing modestly, consumer spending remains a key driver of the economy, though questions linger about its sustainability given declining personal savings rates.
Pending Home Sales Dropped 5.5% in July
- Pending home sales fell 5.5% in July.
- Month over month, contract signings declined in all four U.S. regions.
- Compared to one year ago, pending home sales increased in the Northeast but decreased in the Midwest, South and West.
The key takeaway – Pending home sales in the U.S. declined by 5.5% in July, according to the National Association of REALTORS®, with all four regions posting monthly losses in transactions. The Pending Home Sales Index fell to 70.2, the lowest since the index began in 2001, and year-over-year pending transactions dropped 8.5%. Despite positive factors like job growth and increased inventory, affordability challenges and election-related uncertainty weighed on sales. Regionally, the Northeast saw a slight year-over-year increase, while the Midwest, South, and West experienced declines. Lower mortgage rates are expected to attract more buyers, but the market remains constrained by broader economic factors.
European Stocks Close at Record High After Data Shows Inflation Cooling
- European stocks reached new highs as the Stoxx Europe 600 closed at 525.05, boosted by a broad rally in banks, consumer goods, and pharmaceuticals following data showing eurozone inflation slowed to 2.2% in August, the lowest since mid-2021.
The key takeaway – European stocks closed at a new high on Friday, driven by data showing eurozone inflation slowed to its lowest level since mid-2021, bolstering expectations for another European Central Bank rate cut. The Stoxx Europe 600 index reached an intraday high of 526.66 and closed at 525.05, surpassing its previous record from May. The rally was broad, with gains in European banks, consumer-goods companies, and pharmaceutical businesses like Novo Nordisk. For the year, the index is up about 9.6%. The inflation data, showing a drop to 2.2% in August from 2.6% in July, supports the case for easing monetary policy.
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