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Last week was the best week of the year for the stock market, which clearly means it is going to be a tough act to follow. That does not mean that the stock market is destined to go down this week. It could, yet it might also go up, only it will take a lot to exceed last week's 4.0% advance for the S&P 500 and 6.0% surge for the Nasdaq Composite.
Those moves were spearheaded by a recovery in the mega-cap stocks, a recovery in the semiconductor stocks, and a recovery in expectations that the Fed will cut the target range for the fed funds rate by 50 basis points at this week's FOMC meeting.
A week ago, there was a 30% probability of a 50-basis points rate cut. Today, the probability is 65%, up from 50.0% on Friday, according to the CME FedWatch Tool.
Some weaker-than-expected retail sales, industrial production, and fixed asset investment data for August out of China has advanced growth slowdown concerns and the argument that the Fed should be more aggressive with its first rate cut because real rates (fed funds rate minus inflation rate) are still stuck in an overly restrictive position.
This is another way of saying there is a fear of the lag effect kicking in from the Fed's 11 rate hikes since March 2022. The thinking being that those rate hikes will start to show up in a more pronounced way in economic data and reports on credit quality if the Fed doesn't act now in a more aggressive way.
Those fears didn't necessarily show up in the September Empire State Manufacturing Survey released this morning. It jumped to 11.5 (Briefing.com consensus -4.1) from -4.7 in August with the new orders index increasing to 9.4 from -7.9. The dividing line between expansion and contraction is 0.0.
This news took a little steam out of a Treasury market that had been advancing, sending yields lower. The 2-yr note yield, at 3.53% in front of the report, is at 3.55% now, down three basis points from Friday's settlement. The 10-yr note yield, at 3.62% in front of the report, is at 3.65% now, unchanged from Friday's settlement.
Apple (AAPL) has had some steam taken out if it, too, on some speculation that iPhone16 Pro demand has been weaker than expected. Shares of AAPL are down 2.4% in pre-market trading, which is acting as a drag on the Nasdaq 100 futures along with a pullback in some of the semiconductor stocks, including NVIDIA (NVDA) which is down 1.7%.
The current state of the equity futures market, however, is mixed. The S&P 500 futures are down two points and are trading fractionally below fair value, the Nasdaq 100 futures are down 93 points and are trading 0.5% below fair value, and the Dow Jones Industrial Average futures are up 109 points and are trading 0.3% above fair value.
Overall, the early action for stocks looks fairly muted. That should change as the week progresses. August retail sales data is out tomorrow, August housing starts data will be reported Wednesday, and weekly initial jobless claims, and August existing home sales data will be posted on Thursday.
The focal point of the week will be the FOMC rate decision on Wednesday, but the Fed won't be alone this week in making a policy decision. The Bank of England, Norges Bank, Brazil's central bank, and the Bank of Japan are all slated to make policy decisions.
The market, therefore, will have interest rates on its mind all day, every day.
