Stocks retreated last week to give back a chunk of the previous week’s gains. Value outperformed on the week, but small caps got hit hard. Though it was not a busy week for economic data, a few releases surprised to the upside and renewed concerns that the Federal Reserve (Fed) has more work to do.
Rising oil prices are presenting another headache for the Fed, as more expensive oil fuels inflationary pressures. Though the energy sector has rallied, higher oil prices and positive economic surprises again pushed bond yields up, which could to pose a headwind for equities. Futures markets are now pricing in a 44% chance of a 0.25% rate increase at one of the next two Fed policy meetings, and the policy-sensitive 2-year yield nearly matched its 2023 peak on Wednesday.
On the other hand, bulls were invigorated by the positive economic surprises reinforcing the potential for a soft landing. Cautious Fed speak suggested the central bank may be content to skip a rate hike in September, and bullish sentiment jumped above the historical average for the first time in four weeks according to the weekly AAII Investor Sentiment Survey. Bullish investors have pointed to consumer strength amid weakening inflation, which will be put to the test with August Retail Sales and inflation releases this week.
A look back
- Equities were challenged as the S&P 500 fell about 1.3%. U.S. small caps struggled and dropped 4.3%. Emerging markets outperformed last week and international developed markets lagged.
- Yields climbed amid positive economic data. The 2-year U.S. Treasury yield climbed and closed the week at 4.97%.
- Weekly jobless claims dropped sharply, though this may have been skewed by Labor Day and Hurricane Idalia.
A look ahead
- Inflation reports will highlight a bevy of key economic releases. August Consumer and Producer Price Indices (CPI/PPI) will provide the Fed with valuable data points ahead of its policy decision later this month.
- The August Retail Sales print, set to be released on Thursday, will be an important barometer of consumer strength.
- Economic releases: CPI, PPI, Retail Sales, Industrial Production, Empire Manufacturing, and U. of Michigan Consumer Sentiment.
To read the publication in its entirety, please click the button below "Download PDF".