By Peter Hudlow, CFA, Advisor Directed Portfolio Analyst
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The market’s bearish sentiment all but evaporated last week as investors hit the sack to buy up their favorite momentum stocks, signaling to the bears, “Don’t try to push your luck, just get out of my way.” With positive sessions in all five trading days this week, the S&P 500, Nasdaq and Dow Jones gained 4.4%, 5.9% and 3.6%, respectively, while the 2- to 10-year yield curve inversion continued to shrink (18 basis points). Gold hit an all-time high on Friday ($2,509.28/ounce) and is up +21.5% for the year, thanks to favorable U.S. Federal Reserve (Fed) rate cut expectations and increased geopolitical risks. While improving economic data, including the Producer Price Index (PPI), Consumer Price Index (CPI) and retail sales, were responsible for the rally domestically, it was a different story globally, as the Middle East and Eastern Europe braced for retaliatory attacks against recent provocations from Israel and Ukraine, possibly drawing the United States closer to a direct conflict.
Earnings: Out of the 500 constituents included in the S&P 500, 90.9% have reported second-quarter 2024 earnings, with ~83.4% meeting or beating expectations. Big-box retail heavyweights Home Depot and Walmart reported this past week, delivering top- and bottom-line beats while providing muted forward guidance. Next week will see a continuance of retailer earnings, including Lowe’s, T.J. Maxx, Target, Ross Stores and Dollar Tree. While this mix of upcoming releases will be an important barometer of the consumer, artificial intelligence bulls and the general investment community will continue to white-knuckle this earnings season until the Nvidia release on August 28.
Economic data: Favoring the bulls last week, PPI, CPI and retail sales all posted positive surprises. PPI data released August 13 showed a month-over-month (M/M) +0.1% increase in final demand, while the breakdown of goods (+0.6%) and services (-0.2%) sent mixed signals. The next day, the CPI print exhibited core inflation coming in at +0.2% M/M (+3.2% year-over-year [Y/Y]), while unadjusted (noncore) yearly inflation broke below the all-important 3.0% threshold (+2.9%) for the first time since March 2021. Finally, Thursday’s retail sales data showed a reversal of fortunes, posting a +1.0% M/M increase, sending futures north of 1% pre-market. In aggregate, the slew of data showed inflation has finally been let loose from the noose that’s kept it hanging about (the 5.25%-5.5% federal funds rate), leading to a +1.6% single-day S&P 500 gain Thursday and +4.4% for the week.
USD/JPY Trade: U.S. equities look to have nine lives, refusing to decline for any extended period. Although this type of robust sentiment has never ended poorly in capital markets, let’s play devil’s advocate for a moment. Broadly believed to be the catalyst responsible for the 10% selloff earlier this month, the unwinding of the U.S. dollar-Japanese yen carry trade has hit very strong resistance around the ¥147 (for every $1) mark. The currency pair was essentially flat for the week, and so far has only retraced 25% from the lows (-12% peak-to-trough) relative to the S&P’s ~80% retracement. Further, Japanese inflation pressures seem to be accelerating, and although the Bank of Japan vowed to not raise rates further, its hand may be forced if the yen continues to slide. When a major currency crashes -12% in less than a month, someone, somewhere, is substituting hibachi for gas station sushi, and I’d suspect we will hear more of this in the coming weeks.
Israel-Hamas: While U.S. equities rocked out without a stock rout this week, the two major “hot” conflicts in the Middle East and Ukraine have both escalated dramatically. Starting with the Israel-Hamas conflict, a fresh set of negotiations seem to be falling apart, with newly appointed Hamas leader Yahya Sinwar and Israeli Prime minister Benjamin Netanyahu rejecting proposed cease-fire agreements, despite international pressure. Iran and its proxies have forewarned of a retaliatory missile strike that western and Israeli intelligence fear could overwhelm Israel’s iron dome and force the United States to join the conflict directly. Late last month, Israeli precision drones killed top Hamas political leader Ismail Haniyeh, hours after another strike killed a senior Hezbollah leader in Beirut. This week, the United States positioned an additional aircraft carrier and a guided missile submarine into the region, while the State Department Thursday requested congressional approval on a $20 billion aid package, highlighted by 50 F-15 fighter jets, tactical vehicles and medium-range missiles.
Ukraine on the other hand, circumvented the grinding World War I-style trench warfare on its eastern front this week by utilizing a small force and invading the Kursk region of Russia, marking the first ground offensive on Kremlin soil. The attack baffled military strategists on both sides as Russia’s army is steadily advancing into Ukraine’s eastern provinces, sometimes outnumbering Ukrainian operators 5-to-1. While the long-term strategic effects of the Ukrainian offensive in the Kursk region is unknown, the critical Ukrainian supply-and-logistical hub of Pokrovsk is evacuating citizens in preparation for a Russian push for control.
Elsewhere, the Wall Street Journal broke a story this week detailing that Ukrainian special forces and civilian divers were ultimately responsible for the 2022 Nord Stream II pipeline sabotage. Rogue Ukrainian general Valeriy Zaluzhnyi, now serving as ambassador to the United Kingdom, pushed forward with planning and ultimately executing the mission that blind-sided Europe and the international oil & gas industry. This further complicates an already tumultuous relationship between the European Union and Ukraine, as countries such as Germany and France are still left without reliable natural gas while simultaneously providing ordinance and supplies to their saboteurs.
The parallels within these two conflicts are eerie to say the least, as both have switched from defense to offense, backed by U.S.-made weapons. The Biden-Harris administration, along with the rest of the international community, will continue to spin these conflicts favorably, but any objective observer will agree these wars are getting out of hand.
This week’s notable events include the continuation of earnings from retailers, jobless claims, July S&P Purchasing Managers’ Index, Fed-speak from Powell, Waller, Bostic, Barr, Federal Reserve Open Market Committee (FOMC) minutes from July, and the Jackson Hole Symposium, where Jerome Powell is expected to start hinting at rate cuts. With a light week for data, investors will focus on Fed sentiment, so be prepared for intraday volatility and have a great week.
| TIME (ET) | REPORT | PERIOD | MEDIAN FORECAST | PREVIOUS |
| MONDAY, AUG. 19 | ||||
| 8:15 am | Fed Waller Speech | – | – | – |
| TUESDAY, AUG. 20 | ||||
| 12:35 pm | Fed Bostic Speech | – | – | – |
| 1:45 pm | Fed Barr Speech | – | – | – |
| WED., AUG. 21 | ||||
| 1:00 pm | July FOMC Minutes | July | – | – |
| THURSDAY, AUG. 22 | ||||
| All Day | Jackson Hole Symposium | – | – | – |
| 7:30 am | Initial Jobless Claims | Aug. | 240k | 227k |
| 8:45 am | S&P Global PMI Flash | Aug. | – | 54.3 |
| 9:00 am | Existing Home Sales M/M | July | -0.5% | -5.4% |
| FRIDAY, AUGUST 23 | ||||
| 9:00 am | Jerome Powell Speech | – | – | – |
| 9:00 am | New Home Sales | July | 0.63M | 0.617M |
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