Positive economic indicators and lower inflation data drive market optimism

PCE

The Fed’s preferred measure of inflation, the Personal Consumption Expenditures Index (PCE), released this past Friday. The highly anticipated release saw the 12-month inflation rate come in at 2.20%, down from 2.50% in July, the lowest since February 2021. Although PCE showed inflation continuing to move closer to the Fed’s 2.00% target, core PCE told a different story. Stripping away the volatile food and energy prices, core PCE came in at 2.70%, ahead of last month’s reading of 2.60%, showing that the fight against inflation is not over. However, market consensus prior to the realease anticipated a core PCE increase of 0.20%, larger than the actual rise of 0.10%. With a favorable inflation data shock in August, the market currently favors another 50-basis-point cut at the Fed’s next meeting in November. It’s important to note that corporates should consider taking advantage of this sentiment now by hedging and locking in anticipated rate cuts.

GDP and consumer sentiment

The Bureau of Economic Analysis (BEA) published annualized GDP for the second quarter of 2024 this past Thursday. The Bureau’s third and final estimate of second quarter GDP came in above economists’ expectations of 2.90%, unchanged from July’s advance estimate. The increase in real GDP primarily reflects increases in consumer spending, private inventory investment, and nonresidential fixed investments. Compared to the first quarter, where real GDP grew 1.60%, the jump to 3.00% was an encouraging sign to market participants. Following the positive GDP release, consumer sentiment, a popular measure regarding the American consumer’s outlook on the current economy, added to the list of positive economic indicators released last week. The measure came in at 70.10, a 3.20% increase from August and up 3.40% year-over-year. Although sentiment is still low when compared to a historical average, it seems consumers are beginning to feel encouraged by cooling inflation and a strengthening economy.

Equities

U.S. equities continued to soar this past week, with both the S&P 500 and Dow hitting record highs. The U.S. markets reacted positively to the large stimulus package China issued last week in response to concerns over the nation’s housing sector. The 20 largest Chinese companies listed on the NYSE gained an average of 11%, helping boost the Nasdaq Composite to a two-month high. In combination with strong GDP data released Thursday of last week, both the S&P and the Dow reached record closes.

The week ahead

Nonfarm payrolls highlights a rather quiet week from an economic data release standpoint, as the key jobs indicator releases this Friday. Additionally, market participants should continue to keep an eye on China, as the Chinese government is considering a $142B dollar capital injection into state-run banks which could have implications for U.S. markets.