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CHART OF THE WEEK: A Hated Rally
The S&P 500 gained 3.6% over holiday-shortened week, lifting $SPX above 50 days & 100 days moving averages, triggering short coverings. While Fed expectations grew more hawkish and swaps are now pricing +72bp for September, markets seem to be optimistic that the Central Bank can restore price stability without derailing growth.
WEEKLY SUMMARY: Wall Street broke a string of three weekly losses
Stocks broke a losing streak as investors appeared to grow more confident that the market had reached at least a temporary bottom. Indeed, the Fed’s “Beige Book” indicated that price increases were moderating in nine of its 12 districts, as “lower fuel prices and cooling overall demand alleviated cost pressures, especially freight shipping rates.” A midweek decline in oil prices — which briefly hit their lowest level since Russia’s invasion of Ukraine — and a surprise moderation in Chinese PPI seemed to help foster a stock rally as the most shorted stocks surged. Energy shares underperformed while a rally by Tesla helped the consumer discretionary sector to outperform. US economic data released over the week were mixed; the S&P Global measure fell more than expected, to 43.7, the biggest contraction since early 2020. Meanwhile, the labor market appeared to remain on solid footing, with weekly jobless claims coming in much lower than expected (222k vs. roughly 240k), hitting their lowest level since the start of the summer. The 10-year U.S. Treasury yield jumped to its highest level since mid-June on Tuesday. European stocks rose after some countries announced plans to deal with the energy crisis and boost their economies. As expected, the ECB increased its key interest rates by a record 75 basis points. The euro gained slightly against the dollar while the British pound depreciated further before retracing to roughly USD 1.16, a level near the low hit in 1985. Cryptocurrencies soared.
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Most US equities indexes ended the week lower, although the tech-heavy Nasdaq Composite advanced modestly and cleared the 20,000 mark for the first time. The Russell 2000 Index recorded a second consecutive week of underperformance against the S&P 500 Index. Growth stocks posted a third consecutive week of outperformance versus value, thanks in part to gains in shares of Tesla (12%) and Alphabet (8.4%). On the macro-economic side, stagflation fears started to rise once again. Indeed, YoY CPI and PPI both accelerated. Meanwhile overall macro surprises disappointed for the fourth week in a row: on Thursday, the Labor Department reported a surprise jump in weekly initial jobless claims to a two-month high of 242,000.