Weekly Newsletter August 18th to August 22nd
RECAPPING LAST WEEK
U.S. equity indices finished the week on a strong note, while Treasury yields and the U.S. dollar index tumbled after Federal Reserve Chair Powell signaled that the central bank is likely ready to resume interest rate cuts next month. The S&P500 index overcame earlier weakness caused by retailers’ mixed earnings reports to finish marginally higher while the Nasdaq Composite fell 0.5%, dragged down by concerns around artificial intelligence-related valuations. The Russell 2000 soared nearly 4% on Friday as smaller companies with higher debt loads may benefit from looser Fed policy. Economically sensitive cyclical sectors also posted solid returns for the week. Commodities like gold and oil rose on the prospects of lower rates and a weaker dollar, while Ethereum rocketed 9% to a new record high. In his speech at Jackson Hole, Powell said that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” Odds for a September rate cut—which had fallen below 70% before the speech—jumped to over 90% before settling near 83%. Two-year Treasury yields slid to 3.69% while the 10-year closed near 4.26%. Powell stated that downside risks to employment have risen but also cautioned that the central bank must still guard against the inflationary effects from tariffs. While not exactly dovish, the speech was less hawkish than investors had feared. He also outlined changes to the Fed’s monetary policy framework, removing language about the pre-2021 low-rate environment and returning to flexible inflation targeting. In other economic news, U.S. manufacturing expanded this month at its fastest rate in over three years, with stronger demand also triggering pricing pressures. The S&P Global flash manufacturing PMI jumped to 53.3 while services eased slightly to 55.4. U.S. housing starts and permits rose in July despite high mortgage rates and an uncertain economy, while the growing supply of existing homes took some pressure off home prices. Retailer Home Depot missed expectations for quarterly revenue and profit but did not lower its future guidance. Walmart raised its sales and earnings forecast, noting that thus far, the tariff impact has been gradual enough not to have changed customer habits. Overseas, businesses in Germany and the wider Eurozone saw new orders increase for the first time in over a year, pushing the flash manufacturing PMI to its highest level in more than three years. British composite PMI surged to 53.0, but inflationary pressures returned as CPI jumped to 3.8% YoY in July from 3.6%. Services inflation spiked to 5%YoY, likely pushing back any chance of further rate cuts to spring 2026 at the earliest. Finally, Japan’s core CPI slowed to 3.1% YoY last month as food prices continued to ease.
THE WEEK AHEAD
With investors seemingly more confident in the Fed’s policy path, their attention will likely turn to the jobs and inflation data due before the next FOMC meeting. First up will be this week’s PCE price index, set for release on Friday. Last week Powell said that he believes that inflation effects are likely short-term, a view not necessarily shared by other members of the committee. The PCE release will be scoured for indications either that businesses are continuing to absorb price increases, or that they have begun passing them through to consumers. The headline inflation number has declined recently, even as core readings and producer prices rise. This week the second estimate of Q2 GDP arrives, along with this month’s final consumer sentiment and inflation expectations. Other releases on the U.S. calendar include consumer confidence, new and pending home sales, and goods trade balance figures. Last week’s wobble in technology stocks puts an even bigger spotlight on Nvidia’s earnings report after the close on Wednesday. On the international side, inflation updates from the Eurozone, Japan, and Australia are the main economic releases to watch. Accelerating CPI could push the probability of a Bank of Japan rate hike this year even higher and boost the flagging yen. Minutes from the recent central bank meetings of Australia and Europe round out the calendar.
CHART OF THE WEEK
Optimistic waves
Since the April lows, the S&P500 index (SPX) has ground steadily higher. At the same time, momentum has been slowing, as evidenced by the MACD indicator making a series of lower highs. Some of the recent loss of momentum could be attributed to the uncertainty around the future path of interest rates. Friday’s speech from Fed Chair Powell reassured investors, re-igniting the bull market that was lying in wait. This expansion fits with the Elliott Wave analysis we discussed in last week’s webinar of a developing bullish wave 3 within a larger wave 5. According to Elliott Wave Theory, bull markets develop in 5 waves—three impulse waves along with two corrective waves. Although SPX is potentially in that final wave on a larger degree, it has not yet reached its destination. Projections can be difficult to estimate with the index in uncharted territory, but Fibonacci extensions may provide a framework. In this case the extensions are pointing to the area near $6,800 (indicated by the grey box in the chart) for completion of this wave 3, which could be followed by a corrective wave 4 and then a bullish wave 5. That pattern could ultimately carry SPX above $7,000. However, momentum has not fully resurfaced yet. The MACD will likely have to break above its mid-August high to confirm the index’s continued push to record highs.
Source: Charles Schwab Corporation
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