US stocks have made a dramatic recovery just a week after a significant global sell-off shook markets. The rebound follows a period of intense volatility triggered by multiple economic factors, including the Bank of Japan’s unexpected interest rate hike and concerns over a potential US recession.
The turmoil began in late July when the Bank of Japan raised interest rates for the second time this year. This move disrupted the yen carry trade, a popular strategy where investors borrow low-cost yen to invest in higher-yielding assets. The unraveling of this trade culminated last week, causing Japanese stocks to suffer their worst day in decades. Concurrently, a disappointing July jobs report in the US fueled fears of an impending recession, leading to sharp declines in US stocks and bond yields.
However, this week brought a wave of positive economic data that has helped the market recover much of its recent losses. The Dow Jones Industrial Average has climbed back above the 40,000 mark, while all three major US indexes—Dow, Nasdaq Composite, and S&P 500—posted their best weekly gains of the year. The Dow rose 2.9%, the Nasdaq surged 5.3%, and the S&P 500 increased by 3.9%, with the latter two indexes recovering all the ground lost during last week’s sell-off.
Wall Street’s fear gauge, the Cboe Volatility Index (VIX), which had spiked to 65 last Monday, fell back to 15, indicating a return to relative market calm. Analysts from Ned Davis Research noted that the bull market remains intact, despite the recent upheaval, suggesting that investors are beginning to move past the shock of the yen carry trade unwind.
Cautious Optimism Ahead of Federal Reserve Meeting
Despite the market’s recovery, investors remain cautious as they await the Federal Reserve’s next policy meeting in September. Key economic indicators, such as the July Personal Consumption Expenditures price index and upcoming labor and inflation data, will be closely scrutinized by the Fed before it announces its decision on September 18.
While some traders are betting on an interest rate cut in September, recent comments from Federal Reserve officials suggest a more measured approach. Atlanta Fed President Raphael Bostic indicated a willingness to wait for more consistent signs of cooling inflation before making a move, even though a rate cut seems likely in the near future.
Recent data points to a gradual easing of inflationary pressures. The Consumer Price Index (CPI) rose by 2.9% over the 12 months ending in July, dipping below 3% for the first time since March 2021. Additionally, wholesale price increases have also slowed, offering further evidence that inflation may be moderating.
Retail sales data released this week provided further positive news, showing a 1% increase in July compared to the previous month, well above economists’ expectations. This suggests that consumer spending, a crucial driver of the US economy, remains robust.
As a result of these developments, traders have adjusted their expectations for the Fed’s September meeting. While there is still anticipation of a rate cut, the likelihood of a more aggressive half-point reduction has decreased from 51% to 26%, according to the CME FedWatch Tool.
Market Watch: Key Events and Corporate News
The Russell 2000 index, which tracks small-cap US stocks, jumped 3% this week, reflecting traders’ optimism that the Fed will lower rates in September. Historically, small-cap stocks tend to perform well following the initial rate cut in a Federal Reserve easing cycle.
Looking ahead, all eyes will be on Federal Reserve Chair Jerome Powell, who is scheduled to speak at an economic summit next week in Jackson Hole, Wyoming. Powell has previously used this forum to signal the Fed’s future policy direction, and his remarks could trigger significant market reactions.
In the oil market, US crude prices fell this week after the Organization of the Petroleum Exporting Countries (OPEC) revised its global oil demand growth forecasts downward for 2024 and 2025, citing weakening demand in China.
On the corporate front, Starbucks shares soared 26.3% this week following the announcement that CEO Laxman Narasimhan would be stepping down immediately, to be succeeded by Brian Niccol, the current CEO of Chipotle. Niccol is credited with revitalizing Chipotle after its 2018 E. coli crisis.
Walmart also saw a significant boost, with its shares rising 8.1% after reporting strong quarterly results, including a surge in US sales at stores open for at least one year and a sharp increase in operating income.
As the trading week concluded, these developments helped steady the market, although slight adjustments in stock levels might still occur as the dust settles.
