Weekly | FED: Monetary juggling

Your weekly summary with the most important news for your investments.
Sproutfi Weekly

Your weekly summary with the most important news for your investments:

  • Results of the main stock market indexes.

  • Summary of the FED speech.

Last week, despite the anti-inflation speech reiterated by Federal Reserve (Fed) Chairman Jerome Powell from the annual Jackson Hole Wyoming symposium last Friday, two of the major U.S. stock indexes closed the week higher:

  • With the S&P 500 challenging +0.8%.

  • The Nasdaq recovered +2.3% led by the rebound in the technology sector after Nvidia reported extraordinary sales growth due to the demand for microprocessors to support the growth of artificial intelligence. 

  • With this, the Dow accumulated a year-to-date return of +3.6%, the S&P 500 +14.7% and the technology Nasdaq +29.8%. 

  • Meanwhile in the fixed income market, the 10-year sovereign rate closed the week at 4.23% (-2 basis points) with all Treasury rates below one year term hovering around 5.5% without yet having incorporated another rate hike by the issuing institution for the rest of the year. 

This week ahead we will have a battery of macroeconomic data with the PCE inflation reading and August employment data being the trend setters. On the corporate front Crowdstrike, Lululemon and Salesforce among others will be reporting with it formally closing the second quarterly earnings season. On the political front, the arrest photo of former President Trump was published. Instead of participating in the first presidential debate with his Republican peers, he chose to give an interview on the X platform (formerly Twitter), accumulating more than 260 million impressions and then reopening his controversial comments on the platform using his arrest photo as a kick-off to his presidential campaign.    

Let's start by making a brief summary of the comments made by Powell the previous week where he started by pointing out the following:

"The Federal Reserve's job is to bring inflation down to our 2 percent target, and we will do that. We have tightened policy significantly over the past year. While inflation has come down from its peak (which is welcome), it is still too high. We are prepared to raise rates further if appropriate and intend to keep policy at a restrictive level until we are confident that inflation is declining sustainably toward our objective." 

In doing so, allowing market participants to correct upwards their rate hike expectations towards 60% by a further +25 basis points from the November 1 meeting pausing once again at the next meeting on the following September 20 leaving it at 5.5%. Powell argued the following regarding the country's economic growth: 

"But we are watching for signs that the economy may not be cooling as expected. So far this year, GDP (gross domestic product) growth has exceeded expectations and its long-term trend, and recent readings on consumer spending have been particularly strong. Moreover, after a sharp slowdown over the past 18 months, the real estate sector is showing signs of recovery. Further evidence of persistently above-trend growth could put further progress on inflation at risk and justify further monetary policy tightening."

However, there are those who are emphasizing that the Fed will not be able to adopt more lionizing measures due to the congested banking system where the Fed's third role is to maintain the stability of the financial system. In fact, such is the concern on the part of the credit agencies that S&P 500 chose to downgrade eight other regional financial institutions last week. The underlying problem is that despite all the efforts made by the issuing institution to provide liquidity to the US financial system, the banks have continued to demand US $236 billion in short-term liquidity since March, and inter-institutional confidence has not yet been normalized. This is because further interest rate hikes, higher capital requirements and unexpected losses in the banks' commercial real estate portfolios could generate unexpected losses which, together with another run on deposits, could generate another problem towards the end of the year. This scenario has the FED's hands tied to continue raising the monetary policy rate indiscriminately. This is why Powell ends his speech with the following comment: 

"These uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening it too little. Doing too little could allow above-target inflation to take hold and ultimately require monetary policy to remove more persistent inflation from the economy at a high cost to employment. Doing too much could also cause unnecessary damage to the economy."

Finally, headline PCE inflation is expected to have closed the month at around 3.2% (from 3%) while core inflation is expected to have closed at 4.2% (from 4.1%). On the labor front, expectations are centered on a job creation of 175k with the unemployment rate expected to close at 3.5% in the month of August.

In conclusion, this week market players will be waiting for the tension that will arise from the inflation and employment data to outline the seesaw that the FED will have to manage.

This Week

Monday (August 28)

Quarterly Reports

  • Heico Corporation

  • Nordic American Tankers Limited

  • Baozun Inc.

  • Fonar Corporation

  • Odyssey Marine Exploration, Inc.

Economic Reports

  • Dallas FED Manufacturing Index Report

Tuesday (August 29)

Quarterly Reports

  • HP Inc.

  • Best Buy Co., Inc.

  • Catalent, Inc.

  • Box, Inc.

  • Ambarella, Inc.

Economic Reports

  • S&P/Case-Shiller Home Price Index Monthly Change Report 

  • S&P/Case-Shiller Home Price Index Annual Change Report 

  • Initial jobless claims open

Wednesday (August 30)

Quarterly Reports

  • Salesforce, Inc.

  • Veeva Systems Inc.

  • Chewy, Inc.

  • Freedom Holding Corp.

  • Alvotech

Thursday (August 31)

Quarterly Reports

  • Broadcom Inc.

  • Vmware, Inc.

  • lululemon athletica inc.

  • Dell Technologies Inc.

  • MongoDB, Inc.

Financial reports

  • Personal expense report

  • Personal Income Report

  • PCE Price Index Report

Friday (September 01)

Quarterly Reports

  • Dingdong (Cayman) Limited

  • Hurco Companies, Inc.

  • Benitec Biopharma Inc.

Economic Reports

  • Unemployment Rate Report

  • Nonfarm Payroll Employment Report

  • ISM Manufacturing Index Report

Now you have more information about your investments. See you next week with more news.

*This is an illustrative example and does not represent an investment recommendation.