Markets Post Solid Weekly Gain Following Powell’s Speech…..
U.S. equities finished the session solidly higher, as well as on a weekly basis, adding to a rebound that has the markets back to record high territory. The rally came on the heels of the highly-anticipated speech from Federal Reserve Chairman Jerome Powell, to where he held off on giving a specific start date for tapering its monthly asset purchases, but kept the door open for it to start sometime in Q4. The gains were broad-based, with value/cyclical sectors—Financials, Energy, Industrials and Materials—leading the way, while growth-related issues—Information Technology, Communications Services, and Consumer Discretionary—also contributed. Treasuries gained ground, putting downward pressure on yields, and the U.S. dollar finished lower following Powell’s remarks, while gold and crude oil prices traded higher. In other economic news, personal income and spending data was mixed, August consumer sentiment was revised lower, the trade deficit narrowed more than expected, and wholesale inventories rose at a smaller rate than anticipated. In equity news, Gap rose following its stronger-than-expected Q2 results and raised guidance, while some disappointing Q4 metrics and disclosure of some accounting issues punished shares of Peloton. Stocks in Europe were able to overcome some early pressure and finish higher, while markets in Asia were mixed as a choppy week came to a close.
The Dow Jones Industrial Average advanced 243 points (0.7%) to 35,456, the S&P 500 Index gained 39 points (0.9%) to 4,509, and the Nasdaq Composite increased 184 points (1.2%) to 15,130. In moderate volume, 736 million shares were traded on the NYSE and 3.9 billion shares changed hands on the Nasdaq. WTI crude oil moved $1.32 higher to $68.74 per barrel. Elsewhere, the gold spot price jumped $25.90 to $1,821.10 per ounce, and the Dollar Index—a comparison of the U.S. dollar to six major world currencies—moved 0.4% lower to 92.68. Markets were higher for the week, as the DJIA added 1.0%, the S&P 500 rose 1.5%, and the Nasdaq Composite increased 2.8%.
Personal income and spending report mixed, Fed Chief Powell suggests progress toward goals…..
Personal income rose 1.1% month-over-month (m/m) in July, versus the Bloomberg forecast of a 0.3% increase, following June’s upwardly-revised 0.2% gain. Personal spending grew 0.3%, below estimates of a 0.4% gain and compared to the prior month’s upwardly-adjusted 1.1% increase. The July savings rate as a percentage of disposable income was 9.6%.
The PCE Deflator increased 0.4% m/m, matching expectations and down from June’s unadjusted 0.5% increase. Compared to last year, the deflator was 4.2% higher, above estimates of a 4.1% rise and June’s unadjusted 4.0% gain. Excluding food and energy, the PCE Core Index rose 0.3% m/m, in line with expectations and versus June’s upwardly-adjusted 0.5% rise. The index was 3.6% higher y/y, matching estimates and June’s upwardly-adjusted gain.
The August final University of Michigan Consumer Sentiment Index was revised slightly higher to 70.3, but below expectations for it to be revised to 70.8 from the preliminary reading of 70.2. The upward revision came as a modest upward adjustment on the current conditions component of the survey was met with an unexpected downward adjustment to the expectations portion. The overall index was solidly lower versus July’s 81.2 level, as sentiment regarding both expectations and current conditions fell. The 1-year inflation forecast came in at 4.6%, down slightly from July’s 4.7% rate, but the 5-10 year inflation forecast ticked higher to 2.9% from the 2.8% level in the prior month.
The advance goods-trade balance showed that the July deficit shrank more than expected, coming in at $86.4 billion, versus estimates calling for it to decrease to $90.9 billion from June’s upwardly-adjusted shortfall of $92.1 billion.
Preliminary wholesale inventories rose 0.6% m/m for July, compared to expectations of a 1.0% gain, and versus June’s upwardly-revised 1.2% rise.
The markets digested the highly-anticipated speech from Federal Reserve Chairman Jerome Powell at the Fed’s key virtual monetary policy symposium, with the markets looking for some insight into the timing of the Central Bank’s tapering of monthly asset purchases against the backdrop of mixed economic data and the ultimate impact of the Delta variant.
Powell noted he views that the “substantial further progress” test has been met for inflation and there has also been “clear progress toward maximum employment.” He added that at its July meeting, he and most participants were of the view that if the economy evolved broadly as anticipated it could be appropriate to start reducing the pace of asset purchases this year. Powell pointed out that the intervening month since its last meeting has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. As such, “We will be carefully assessing incoming data and the evolving risks,” he said, pointing out that even after asset purchases end, elevated holdings of longer-term securities will continue to support accommodative financial conditions.
Powell also stressed that, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test. We have said that we will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time. We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis.” Although Powell did not signal a definitive start date for reining in its asset purchases, or “tapering,” he did appear to keep expectations intact that it could begin sometime in Q4.
Treasuries were higher following Powell’s remarks, as the yield on the 2-year note decreased 3 basis points (bps) to 0.22%, while the yields on 10-year note and the 30-year bond declined 4 bps to 1.31% and 1.93%, respectively. The U.S. dollar finished noticeably to the downside following the speech.
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