RECAPPING LAST WEEK

U.S. equities rebounded from their worst week of 2024, rallying sharply after the latest inflation data
reinforced the idea that consumer prices are trending toward the Federal Reserve’s 2% target. The
Nasdaq Composite index soared 6%, while the S&P500 and the Russell 2000 jumped more than 4%.

Every S&P500 sector except energy posted gains, led by an 8% spike in technology. Crude oil prices
rose 1.5% as Hurricane Francine forced U.S. output disruptions, while gold futures climbed 3% to
$2,610 per ounce, a new record. Wednesday’s U.S. CPI release initially triggered a selloff in risk
assets and a rise in U.S. Treasury yields after the core reading came in slightly above expectations,
dampening hopes for a half-point rate cut at the upcoming FOMC meeting. Investors also weighed
potential fiscal policy shifts following Tuesday’s U.S. Presidential debate. After these setbacks,
though, equity indices staged a vicious turnaround, and by week’s end the implied odds of a 50bps
cut climbed back near 50%.

In other economic news, the Fed revealed changes to proposed U.S. banking regulations that would reduce the extra capital requirement for large banks by half. In spite of this news, bank shares tumbled, as the Fed’s announcement was more than offset by expectations that net interest income and trading revenue for the largest banks will decline in the second half of this year. U.S. consumer sentiment rose to a four-month high in September, boosted by tamer inflation expectations and an improved view of the economy. Overseas, the European Central Bank cut interest rates by a quarter point and signaled a “declining path” for rates in the months ahead. The ECB may wait until the December meeting to make further adjustments, when more economic data becomes available. The European economy has remained under pressure, with Germany’s struggles playing a major role, but thus far, the EU has avoided recession. Former ECB President and Italian Premier Mario Draghi issued a scathing report on European competitiveness, warning that without policy changes, the EU faces lasting sluggish economic growth. Meanwhile, GDP growth in the UK continued to flatline MoM, even as the labor market strengthened.

Finally, China’s CPI accelerated in August, but the move was attributed to higher food costs rather than a rise in consumer demand. Producer prices continued to slide, down 1.8% YoY, while China’s
exports were a bright spot, increasing 9% YoY.

THE WEEK AHEAD

All eyes will be on Wednesday’s FOMC rate decision, as the Fed faces a close call on the expected
interest rate cut’s size. Most observers anticipate a quarter point reduction; a larger cut may send the wrong message about an imminent risk of recession. In addition, a 50bps cut may be viewed as
excessive given that current forecasts for Q3 GDP growth are around 2.5%. This FOMC meeting will
also include updated economic projections and dot plots.

The rest of the U.S. economic calendar is busy, with retail sales, regional manufacturing updates, and housing data on the agenda. Overseas, market pricing suggests that the Bank of England will opt for no changes in interest rates at its meeting on Thursday.

The latest UK CPI report will be released the day before, and concerns remain
about high services inflation. Finally, the Bank of Japan could deliver a surprise hike given its recent
hawkish comments, although recent data suggest the pressure to raise rates has been pushed to
later this year. Traders are mindful that the yen continues its steep rise against the U.S. dollar, which
wreaked havoc on global markets in August.

(Source: Schwab)