Three sessions ago the S&P 500 closed at 4,376. Yesterday, it hit 4,500 and closed a whisker shy of that intraday high. To say the least, the stock market has had a good, little run the past three sessions, paced by mega-cap leadership and gains across all 11 S&P 500 sectors.
Trading volume has been remarkably light during this run; nonetheless, the prevailing bias has been unmistakable and aided by a drop in market rates.
Tuesday’s session had a big tailwind behind it as the weaker-than-expected JOLTS – Job Openings Report for July and the Consumer Confidence Index for August sent Treasury yields sharply lower. The 2-yr note yield dropped 15 basis points to 4.91% and the 10-yr note yield fell nine basis points to 4.12%.
Briefly, the market took solace in the thought that the soft data, particularly the jobs data, would be regarded by the Fed as a basis not to raise the target range for the fed funds rate again. That view was corroborated by the fed funds futures market, which showed a sub-50% probability of another 25 basis points rate hike at the September, November, and December FOMC meetings.
Prior to the JOLTS and Consumer Confidence reports, the probability of a 25 basis points rate hike at the November meeting was 62.3%. Today it sits at 41.2% with another round of economic data helping to lower the rate-hike temperature.
The ADP Employment Change Report for August showed an estimated 177,000 jobs were added to private-sector payrolls (Briefing.com consensus 195,000), which is a sharp deceleration from the upwardly revised 371,000 jobs (from 324,000) reported for July.
The key takeaway from this report, however, was the softening in pay growth for job stayers to 5.9% year-over-year — the slowest since October 2021. The report noted that pay growth slowed for the first time in all 50 states and Washington, D.C.
The second estimate for Q2 GDP growth, meanwhile, was marked down to 2.1% (Briefing.com consensus 2.4%) from the advance estimate of 2.4%. The GDP Price Deflator also got marked down to 2.0% (Briefing.com consensus 2.2%) from the advance estimate of 2.2%. The PCE Price Index got revised lower to 2.5% from 2.6%, as did the core-PCE Price Index, which checked in at 3.7% versus the advance estimate of 3.8%.
The key takeaway from the report is that it fits the soft landing scenario; also, there were downward revisions to the inflation readings, which is something that will continue to drive the market’s belief that the Fed can refrain from another rate hike.
The 2-yr note yield, at 4.90% just before the GDP release, is at 4.85%, and the 10-yr note yield, at 4.15% just before the GDP release, is at 4.11%.
The equity futures market saw some uplift following the data, seemingly riding the theme that less good economic news is good news if it keeps the Fed on hold. Still, there wasn’t a flood of buying interest, as traders remain cognizant that the S&P 500 has gained nearly 3.0%, and that the Nasdaq Composite has gained 3.6%, in the last three sessions alone. We suspect traders might be showing some hesitation, thinking that this heady action can’t persist or, at least, opting to wait and see if it does.
Currently, the S&P 500 futures are up two points and are trading fractionally above fair value, the Nasdaq 100 futures are up four points and are trading 0.1% above fair value, and the Dow Jones Industrial Average futures are up 37 points and are trading 0.1% above fair value.
Originally Posted August 30, 2023 – Market expects Fed to sit tight after econ data
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