Wall Street bounces back
All the US majors closed with decent gains on Friday, following a difficult week. Equities were supported by the latest inflation update, which was generally viewed favourably. Core PCE, the Fed’s preferred inflation measure, rose 2.9% year-on-year in August, unchanged from the previous month. While still well above the Fed’s 2% inflation target, Friday’s update wasn’t viewed as hot enough to quash the possibility of another two 25 basis point rate cuts before year-end.
This upbeat interpretation helped to bolster sentiment across the main US stock indices. The small-cap, domestically focused Russell 2000 led the rally, ending the day up 1%. The Dow, S&P 500 and NASDAQ tacked on 0.7%, 0.6% and 0.4% respectively. Despite these gains, the majors all closed lower for the week.
For the week, the S&P 500 slipped 0.3%, marking its weakest stretch since early August, while the Nasdaq fell 0.7%, the Russell 2000 lost 0.6% and the Dow edged lower by 0.2%, ending a three-week winning run.
Source: TN Trader
Investors had second thoughts about the size and effectiveness of investments in the artificial intelligence (AI) space. Key amongst these was NVIDIA’s $100 billion investment in ChatGPT owner, OpenAI. Analysts were starting to question the ‘circularity’ of the move, whereby NVIDIA invests in its customers, thereby giving them the resources to carry on buying its chips.
Investors were also questioning the Fed’s appetite for additional rate cuts going into the year-end. Last week brought the release of strong housing data, a large upward revision to second-quarter GDP, better-than-expected Durable Goods, and, perhaps most importantly, a sharp drop in weekly Unemployment Claims.
All this helped to encourage the view that the US central bank may be in less of a hurry to ease monetary policy further, given the strength of the US economy, on top of tariff uncertainty.
Maybe the market will get more clarity this week, which is a busy one for labour statistics, rounding off on Friday with the latest Non-Farm Payroll data. This has been very poor of late and subject to some thumping revisions. In contrast, the weekly Unemployment Claims data, along with a subdued Unemployment Rate, suggest that labour market concerns may be overdone.
US stock index futures were all sharply higher in early trade on Monday. Could this be the start of another rally as we head towards the fourth quarter? Or will there be other obstacles for US equities this year?
One possible issue is the usual political battle in Congress to agree on a government budget. This needs to be sorted by the close of play tomorrow. This time, President Trump has warned that a failure to reach an agreement will result in federal job losses, which could turn out to be permanent.