Weekly Wrap

It was another strong week for stocks. Early in the week, gains were fueled by optimism about the Fed cutting rates by 50 basis points. The Fed delivered and gains continued until Friday, when the market closed flattish as participants digested the solid run in equities. Friday's session was also a "quadruple witching" quarterly expiration of stock options, index options, single stock futures, and index futures.

The Federal Open Market Committee (FOMC) voted in favor of cutting the target range for the fed funds rate by 50 basis points to 4.75-5.00%. It was not a unanimous vote. Fed Governor Bowman preferred a 25-basis points rate cut.

The directive indicated that the Committee has "gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance." 

The Summary of Economic Projections showed a shift in the median estimate for the 2024 unemployment rate to 4.4% (from 4.0% in June) and a downward shift in PCE inflation to 2.3% (from 2.6% in June) and core-PCE inflation to 2.6% (from 2.8%). The dot-plot, meanwhile, shows a median estimate for 2024 (4.40%) that implies another 50 basis points of rate cuts this year and another 100 basis points in 2025.

Fed Chair Powell defended the larger, 50-basis points cut as a proper "recalibration" to make sure the labor market and the economy remain in a solid condition and that the intent of the more aggressive move is to make sure they remain there. He also said that the Fed doesn't feel like it is behind the curve with its policy rate and that the larger cut can be construed as a sign of the Fed's commitment not to get behind.

This thinking drew in buyers, along with a fear of missing out on further gains. The S&P 500 and Dow Jones Industrial Average reached fresh record highs in the wake of the Fed's latest decision. 

This week's data largely corroborated the market's thinking that the Fed can orchestrate a soft landing for the economy. Retail sales and industrial production were both stronger than expected in August, weekly jobless claims remain steady below recession-like levels, and the Philadelphia Fed Index tipped back into expansion (i.e. above 0.0 reading) in September.

Only three S&P 500 sectors settled lower. The defensive-oriented health care (-0.6%) and consumer staples (-1.2%) sectors were among the laggards. Meanwhile, the energy (+3.8%), communication services (+3.7%), and financial (+2.4%) sectors were the top performers. 

Monday: 

The Dow Jones Industrial Average jumped more than 200 points, settling at a fresh record high, and the S&P 500 rose 0.1%, closing 0.6% below its all-time high. The Nasdaq Composite, meanwhile, registered a 0.5% decline.

Mega cap names and semiconductor shares, which outperformed last week, trailed the broader market and clipped the Nasdaq's performance.

Broad buying activity elsewhere left nine sectors higher than Friday.

Increased expectations of a 50 basis points rate cut at this week's FOMC meeting supported the underlying positive bias in equities through the session.

Reviewing Monday's economic data:

• September NY Fed Empire State Manufacturing 11.5 (Briefing.com consensus -4.1); Prior -4.7

Tuesday:

Tuesday's session started on an upbeat note, leading the S&P 500 and Dow Jones Industrial Average to new all-time intraday highs. Stocks faded from session highs, though, leaving the S&P 500 and DJIA near their flat lines at the close.

Market participants were digesting some relatively pleasing economic data, which supported the soft landing narrative and didn't change the market's rate cut expectations that much. Retail sales and industrial production were both stronger than expected in August, and the likelihood of a 50 basis points rate cut tomorrow sits at 63.0% from 34.0% one week ago, according to the CME FedWatch Tool.

The market's optimistic view on the economy and rate cuts contributed to an overall positive bias, and to the outperformance of small cap stocks and cyclical sectors.

Reviewing Tuesday's economic data:

• August Retail Sales 0.1% (Briefing.com consensus -0.2%); Prior was revised to 1.1% from 1.0%, August Retail Sales ex-auto 0.1% (Briefing.com consensus 0.2%); Prior 0.4%
  • The key takeaway from the report is that control group sales -- the component that factors into GDP -- were up a sturdy 0.3% following an upwardly revised 0.4% increase (from 0.3%) in July and 0.9% increase in June. There is no hard landing in those numbers.
• August Industrial Production 0.8% (Briefing.com consensus 0.1%); Prior was revised to -0.9% from -0.6%, August Capacity Utilization 78.0% (Briefing.com consensus 77.9%); Prior was revised to 77.4% from 77.8%
  • The key takeaway from the report is that industrial production snapped back in August, led by manufacturing output and a near 10% increase in the index of motor vehicles and parts, after being depressed by Hurricane Beryl in July.
• July Business Inventories 0.4% (Briefing.com consensus 0.4%); Prior 0.3%
• September NAHB Housing Market Index 41 (Briefing.com consensus 41); Prior 39

Wednesday:

Wednesday's session started sluggish in front of the afternoon's headline event. The Federal Open Market Committee (FOMC) voted in favor of cutting the target range for the fed funds rate by 50 basis points to 4.75-5.00%. It was not a unanimous vote. Fed Governor Bowman preferred a 25-basis points rate cut.

There was some whipsaw trading action in the stock market and the Treasury market after the FOMC announced a 50-basis points rate cut at 2:00 p.m. ET and as Fed Chair Powell conducted his press conference, which began at 2:30 p.m. ET.

The major indices hit session highs in response, which marked fresh record highs for the S&P 500 (-0.3%) and Dow Jones Industrial Average (-0.3%), but ultimately settled lower than Tuesday.

The interesting action was in the Treasury market. The monetary policy rate was cut, and it is likely to get cut again (several times) based on the Fed's own projections. The interesting thing is that Treasury yields, which dropped initially, moved higher, with the 10-yr note yield settling the session higher than where it was before the 2:00 p.m. ET policy decision.

The connection here is that the Treasury market could be pricing in some inflation angst in a curve-steepening trade.

Reviewing Wednesday's economic data:

• The weekly MBA Mortgage Applications Index rose 14.2% with refinance applications surging 24% and purchase applications jumping 5%
• Housing starts increased 9.6% month-over-month to a seasonally adjusted annual rate of 1.356 million units (Briefing.com consensus 1.320 million), bolstered by a 15.8% increase in single-unit starts. Building permits increased 4.9% month-over-month to a seasonally adjusted annual rate of 1.475 million (Briefing.com consensus 1.415 million), aided by a 2.8% increase in single-unit permits.
  • The key takeaway from the report is that single-unit starts and permits were up in every region, reflecting increased activity among builders that has been facilitated by sliding interest rates and pent-up demand.
• The weekly EIA Crude Oil Inventories showed a draw of 1.63 million barrels following last week's build of 833,000 barrels

Thursday:

The stock market had a decidedly strong showing. The rally was in response to the decision by the FOMC to cut the target rate for the fed funds rate by 50 basis points to 4.75-5.00%. The gains also reflected a belief that the economy is in good shape and the Fed will cut rates as needed to maintain a solid economic backdrop. Thursday morning's data supported this optimistic view.

Just about everything came along for the upside ride, boosted by a fear of missing out on further gains, along with strength in the mega caps and chipmakers.

Reviewing Thursday's economic data:

• Weekly Initial Claims 219K (Briefing.com consensus 232K); Prior was revised to 231K from 230K, Weekly Continuing Claims 1.829 mln; Prior was revised to 1.843 mln from 1.850 mln
  • The key takeaway from the report is that there is nothing in the low initial claims reading that, as Fed Chair Powell might agree, suggests the likelihood of a recession, or downturn in the economy, is elevated.
• Q2 Current Account Balance -$266.8 bln; Prior was revised to -$241.0 bln from -$237.6 bln
• September Philadelphia Fed Index 1.7 (Briefing.com consensus 3.0); Prior -7.0
• August Existing Home Sales 3.86 mln (Briefing.com consensus 3.90 mln); Prior was revised to 3.96 mln from 3.95 mln
  • The key takeaway from the report is that more inventory is becoming available with mortgage rates dropping, yet it is still a tight market, evidenced by the ongoing increase in the median home price.
• August Leading Homes Sales -0.2% (Briefing.com consensus -0.3%); Prior -0.6%

Friday:

Friday's trade featured above-average volume due to the quarterly expiration of stock options, index options, single stock futures, and index futures. 

The overall downside bias was related to consolidation activity after a solid run for stocks. The Russell 2000 still logged a 2.1% gain this week and the S&P 500 climbed 1.4% since last Friday.

Weakness in the chipmaker space was another factor in the trade, leading the PHLX Semiconductor Index (SOX) to decline 1.3%. 

The S&P 500 utilities sector benefitted from a big move up in Constellation Energy (CEG), which announced a 20-year power purchase agreement with Microsoft that will include the restart of Three Mile Island Unit 1.

There was no US economic data of note.