Market Review 15th August 2024

CPI Data, Strong Retail Sales, and Market Optimism Drive Gains

U.S. and Canadian Stocks Rally Amid Strong Economic Indicators

On Thursday, August 15, 2024, U.S. and Canadian equity markets closed higher, buoyed by strong retail sales data, easing recession fears, and solid earnings reports. The S&P 500, Dow Jones Industrial Average (DJIA), and Nasdaq Composite all posted substantial gains, with the S&P 500 and Nasdaq experiencing their best six-day rally since November 2022. Meanwhile, the Toronto Stock Exchange (TSX) followed suit, driven by robust performances in consumer discretionary, technology, and materials sectors.

Key Highlights:

• S&P 500: Closed at 5,543.22, up 1.61%, marking its best six-day gain since November 2022.

• Dow Jones Industrial Average: Closed at 40,563.06, up 1.39%, achieving its best day in a week.

• Nasdaq Composite: Finished at 17,594.50, up 2.34%, logging its best six-day rally since November 2022.

• TSX: Also saw significant gains, with large-cap stocks trailing small-cap stocks but outperforming mid-caps.

Retail Sales Surge and Consumer Resilience

One of the main drivers of the stock market's impressive performance was the robust U.S. retail sales data for July 2024. Retail sales grew by 1% month-over-month, far exceeding the market's expectation of a 0.3% increase. This marks the biggest gain in 18 months, largely fueled by a rebound in auto sales following a recent cyberattack that had temporarily disrupted the industry.

Implications of Retail Sales Data:

• Consumer Resilience: The strong retail sales data, coupled with Walmart's better-than-expected Q2 earnings, suggests that the U.S. consumer remains resilient. This resilience is crucial for sustaining economic growth, even as consumers gradually pull back on spending.

• Market Sentiment: The robust consumer data helped ease recession fears, contributing to a broad-based rally in equity markets. The data also bolstered the "soft landing" narrative, where the economy slows down but avoids a full-blown recession.

Labor Market Cooling, But No Collapse

The labor market continues to show signs of gradual cooling, which the markets interpreted positively. Weekly jobless claims fell for the second consecutive week, coming in at 227,000, below the expected 233,000. This data suggests that while the labor market is loosening, it is not collapsing, which is consistent with the "soft landing" scenario.

Key Takeaways:

• Jobless Claims: The lower-than-expected jobless claims support the notion that the U.S. economy is on track for a gradual slowdown rather than a sharp contraction.

• Wage Growth and Inflation: A looser labor market is expected to lead to slower wage growth, which could help ease services inflation. This development is likely to be welcomed by the Federal Reserve as it navigates its monetary policy in the coming months.

Bond Market and Treasury Yields Reaction

The bond market responded to the positive economic data with a rise in Treasury yields. The 2-year Treasury yield, which is sensitive to changes in Fed policy, rose by 15 basis points to 4.10%, marking its biggest one-day increase since April 2024. Meanwhile, the 10-year U.S. Treasury yield climbed to 3.92%, while the 10-year Government of Canada yield hovered around 3.07%.

Bond Market Highlights:

• 2-Year Treasury Yield: Rose by 15 basis points to 4.10%, reflecting expectations of a slower pace of interest rate cuts by the Fed.

• 10-Year Treasury Yield: Increased to 3.92%, as stronger-than-expected retail sales eased recession concerns.

• 10-Year Government of Canada Yield: Stood at approximately 3.07%, aligning with the broader rise in global bond yields.

Sector Performances and Notable Earnings

The gains in the equity markets were broad-based, with notable performances in the consumer discretionary, technology, and materials sectors. These sectors, often considered risk-on, led the market higher, reflecting investor optimism.

Consumer Discretionary:

• Walmart (WMT): Walmart's strong Q2 earnings report was a key highlight, as the retailer beat estimates and raised its outlook. This performance is seen as a barometer of consumer health, particularly as inflationary pressures persist.

Technology:

• Apple (AAPL): Apple shares gained momentum, contributing to the tech sector's rally. Investors continue to view the tech giant as a safe haven amid broader market volatility.

• NVIDIA (NVDA): NVIDIA's stock also surged, driven by optimism around its leadership in the AI and semiconductor markets.

Materials:

• Gold and WTI Oil: Both gold and WTI oil traded higher, reflecting investor confidence in the commodities market. The rise in commodity prices also supported the materials sector, further boosting market sentiment.

Global Market Movements

Global equity markets mirrored the positive sentiment seen in the U.S. and Canada. In Asia, Japan's GDP growth for Q2 2024 exceeded expectations, lifting market indices. European markets were also higher, bolstered by U.K. inflation data for July that came in below estimates, providing relief to investors concerned about the region's economic stability.

Asian Markets:

• Japan: Strong Q2 GDP growth fueled gains in the Nikkei and other regional indices, as investors welcomed the better-than-expected economic performance.

European Markets:

• U.K. Inflation: The lower-than-expected inflation data for July eased concerns over the Bank of England's rate hike trajectory, leading to gains across European markets.

Commodities and Currency Markets

The commodities market saw mixed results, with natural gas prices experiencing volatility while crude oil and gold posted gains. The U.S. dollar strengthened against major currencies, supported by the robust economic data and rising Treasury yields.

Commodities:

• Natural Gas: Prices briefly reached a five-week high before closing lower, influenced by unexpected weekly storage data from the Energy Information Administration (EIA). The EIA reported a decline in U.S. natural gas supplies, contrary to market expectations for a build.

• Crude Oil: WTI crude oil closed higher at $78.00 per barrel, up 1.33%, while Brent crude settled at $80.90 per barrel, down slightly by 0.17%. The rise in oil prices reflects continued concerns over supply constraints and geopolitical tensions.

• Gold: Gold prices edged higher, benefiting from the broader risk-on sentiment and concerns over inflation.

Currency Markets:

• U.S. Dollar: The dollar advanced against major currencies, supported by the strong retail sales data and rising bond yields. The dollar's strength was particularly evident against the euro and yen, as investors flocked to the safety of the greenback amid global economic uncertainties.

Looking Ahead: Fed and Bank of Canada Rate Decisions

Market participants are closely watching the upcoming monetary policy decisions by the Federal Reserve and the Bank of Canada. The recent economic data, particularly the retail sales and jobless claims figures, have led to a shift in expectations regarding future rate cuts.

Federal Reserve:

• Rate Cut Expectations: While the strong retail sales data has eased fears of an imminent recession, it has also reduced the likelihood of a 50 basis points rate cut in September. UBS economists suggest that the Fed may opt for a more modest 25 basis points cut, depending on the labor market's performance in the coming weeks.

Bank of Canada:

• Interest Rate Outlook: The Bank of Canada is also expected to continue its rate-cutting cycle later this year, as the economy shows signs of slowing. However, the recent uptick in consumer spending and resilient labor market may lead to a more cautious approach.

Conclusion: A Strong Day for Markets Amid Optimism

Thursday, August 15, 2024, was a strong day for equity markets in the U.S., Canada, and globally. Investors were encouraged by robust retail sales data, easing recession fears, and positive earnings reports, leading to broad-based gains across sectors. The resilient consumer, coupled with a gradually cooling labor market, has reinforced the "soft landing" narrative, providing a positive backdrop for stocks.

As the markets move forward, all eyes will be on the Federal Reserve and Bank of Canada as they navigate the complex economic landscape. With inflationary pressures moderating and economic growth continuing, albeit at a slower pace, the coming months will be crucial in determining the future direction of monetary policy and market performance.