Equities Rally as Economic Data Continues to Support a Strong Economy
Equities finished up on the week as the S&P 500 and Dow Jones Industrial Average notched new all-time highs. The NASDAQ lagged and is three months removed from its all-time high. Small caps were up 3.9% as the AI trade shifted away from big tech. The AI theme continues to power stocks, but this week saw a big jump in alternative energy stocks and component makers that support the data center buildout.
The China trade has faded as of late as details on policy support underwhelmed expectations. Equities in Hong Kong had their largest 10-day rally since 2008 as authorities hinted that support would be increased. They proceeded to drop 9.5% when more details failed to live up to expectations. China Beige Book is a private, in-country research company that tracks China’s economy. They have a good track record and are considered a reliable source. They do not expect a bazooka monetary policy response, and they are expecting continued growth deceleration. This has spillover risks into the United States as liquidity watchers are also viewing China as a risk to United States markets in 2025.
The S&P 500 is up 4% since the Federal Reserve (Fed) cut interest rates by 50 basis points one month ago. Things to watch following the Fed cut:
- A higher stock market after the Fed begins cutting is the hallmark signal that a recession will be averted.
- The Citi Economic Surprise Index is now near a six-month high.
- Higher stock prices feed back into better-than-expected economic outcomes.
Recession Angst Fueled Market Rally
The recession camp was getting a bit crowded as the Fed was poised to begin a rate cutting cycle. It was too crowded in the sense that if the data didn’t weaken immediately, markets were positioned for an unwind. This has led equities to push higher despite high valuations and 10-year Treasury yields to move up 50 basis points in a month.
Economic data this week was focused on inflation, which was worse than expected. Core Consumer Price Index (CPI) was up 0.3% on the month, when 0.2% is the target number. The year-over-year number was up for the second straight month, now at 3.3%. The super-core CPI, which was the prime focus of the Fed during the rate hiking campaign, is up 4.3% from the prior year. Super-core inflation has gone from 3.8% a year ago to 4.3% now but seems to be a forgotten concept.
Despite the higher inflation readings, the Fed is poised to cuts rate in November and the market continues to see six more cuts this cycle. This is how you get the Treasury curve between the 2-year and 30-year to steepen 90 basis points in three months.
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Sources: BTC Capital Management, Bloomberg
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