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Dow nears record then falters on job numbers, Fed rate hike

A week of "almosts" for Wall Street turned out to be good enough, as markets trundled ahead with modest gains in the face of what is likely the last interest rate hike for the year and okay job numbers.

MANHATTAN (CN) — The Dow Jones Industrial Average could have pulled off a historic feat this week, matching or even beating its all-time win streak record going back to the late 1800s, but markets pulled back on Thursday.

Still, the week’s gains were sizeable, with the Dow picking up 231 points since last Friday’s closing bell, the S&P 500 increasing 46 points, and the Nasdaq composite netting 284 points.  

“Stocks can’t go up every single day, and a pullback at some point shouldn’t be a shock,” wrote Tom Essaye of the Sevens Report in a Friday morning investor’s note. “However, unless we get material damage to one of the three pillars of the rally … any pullback should be modest.”

So far, the three pillars have been doing just fine, according to economic data released this week: Inflation continues to come down, the possibility of a recession is receding, and interest rate hikes seem to be on the way out.

The big news of the week, but hardly unexpected, was the decision by the Federal Reserve on Wednesday to increase interest rates by 25 basis points, likely their last of the year. The federal funds rate now sits at 5.25% to 5.5%, the highest it has been in more than two decades.

What’s more, the central bank no longer thinks the United States will enter an economic downturn. During a question-and-answer session with reporters after the announcement, Fed Chair Jerome Powell noted the “extraordinary resilience” of the economy and said his staffers “are no longer forecasting a recession.”

The Fed’s change in attitude comes despite its downgrade of the U.S. economy from a “modest” expansion to a “moderate” one in the latest forecast, and in the face of recent economic indicators.

“This is quite the pivot in a month,” Ryan Sweet, chief U.S. economist at Oxford Economics, wrote in an investor’s note, adding that “the Fed is signaling that it will err on the side of doing too much to ensure that it kills inflation at the potential expense of the broader economy.”

For those hoping for a glimmer of easing later this year or in early 2024, Powell said there are no immediately plans to start cutting interest rates, adding that “there’s a lot of uncertainty between what happens with the next meeting cycle, let alone the next year.”

Experts say it is possible the Fed may return to the well on interest rate hikes if inflation remains sticky, but they also note the September meeting will likely be another “skip” session for the central bank while it evaluates whether the current 3% inflation rate continues to dip down to its 2% target rate.

“With core inflation on course to slow between now and then, the Fed will probably refrain from further rate hikes,” said Bill Adams, chief economist at Comerica Bank. “If wage growth or inflation surprise to the upside in the second half of 2023, the Fed could make one more rate hike before the end of this year.”

The inflation outlook looks bright, too. On Friday, the U.S. Bureau of Economic Analysis reported the personal consumption expenditures price index, a key inflation indicator, increased by 0.2% last month. The annual rate of inflation is now at a negative 0.6%, the lowest rate seen since 2020, while core inflation has dropped to 4.1%.

The softer-than-expected key inflation indicator “points to a higher probability of a soft landing,” said Gina Bolvin, president of Bolvin Wealth Management, noting markets could ramp up higher on the good news.

Gross domestic product also has proven resilient, according to the BEA, with a 2.4% increase in the second quarter of this year, higher than the 2% increase in the first quarter of 2023 and better than the median forecast.

Experts diverge on what the GDP data mean for the possibility of the economy sticking a soft landing from the Fed’s battle with inflation.

“The U.S. economy has much better odds of securing a soft landing than it seemed at the turn of the year,” Adams said. “In fact, the Fed will likely see the second quarter’s solid GDP growth as a little too strong.”

Others, like Essaye, believe the GDP report won’t move the needle for the Fed and that the economy may not see any slowdown at all. “Looking forward, this is again stale economic data so it won’t make the Fed any more hawkish, but it will anecdotally reinforce the No Landing scenario,” he wrote.

Consumers increasingly share a positive outlook for the economy. In the latest University of Michigan survey, the consumer sentiment index rose from 64.4 in June to 71.6 this month.

The consumer expectation index also increased, from 61.5 last month to 68.3 in July.

Follow @NickRummell
Categories / Economy, Financial, Securities

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