A week can be a long time in the markets

It was one crazy week last week. The S&P 500 index initially saw a 158 basis-point rally on Wednesday following the FOMC meeting, before falling more than 1% both Thursday and Friday. It closed the week at 5346, down 206 basis points for its third straight red week. The Nasdaq 100 fell more, down 306 basis points—and is now almost 11% from its peak—while small caps got crushed, falling 3% on both Thursday and Friday to close the week down 667 basis points. Yields were sharply lower, with the 10-year U.S. Treasury down 40 basis points to 3.79% and the 2-year down 50 to 3.88%. This morning, the volatility has intensified, at one point the VIX spiked the most since 2020. Also, the Nikkei Index plunged today, continuing its downward trajectory on Thursday and Friday in reaction to the Bank of Japan’s interest-rate hike on Tuesday.

This move, coupled with the rising speculation of a domestic interest rate cut has seen the Yen exchange rate collapse from 154 on Tuesday to 145 early Sunday night, and down from a peak of 161 on July 3.

So, what happened? While markets recently have been cheering the bad data as a sign rate cuts would soon come, Thursday’s data was perhaps so poor it was no longer “good.” The culprit was the ISM manufacturing print, which disappointed at 46.8 versus expectations of 48.8. It is a diffusion index, in which a reading over 50 signals an expansion and under 50 a contraction. Furthermore, the employment component came in at just 43.4—its lowest level since 2020, having previously hit that number during the Global Financial Crisis. This spooked markets at the potential of a hard landing. As a result, yields dropped, and so did equities. The fears were reinforced with the Jobs report on Friday, that showed the U.S. added only 114,000 jobs in July compared to estimates of 175,000. The unemployment rate came in at 4.3%, triggering the so-called “Sahm Rule,” which is touted as a predictor of recessions.

However, the jobs report might not have been as horrible as perceived. Looking at the household survey, 436,000 people said they could not work due to inclement weather, the highest such reading for July in history. Whether this shows a bounce back next month, well, we will have to wait and see. Regardless, the fed futures market is now pricing in a whopping 4.6 rate cuts between now and the end of the year, including a significant probability of a 50-basis point cut to kick off the cycle in September.

Earnings season volatility

Earnings estimates continue to be beat, but stock reactions have been volatile. Through 377 names, the S&P 500 is seeing aggregate earnings beats of 5.2% and revenue beats of 0.9%. However, this hasn’t necessarily been converted into stock returns. Concerns about the health of the consumer “trading down on price” and not buying large ticket items at a pace consistent with a robust economy sent the stock down nearly 9% on Friday. This week will be slower in terms of the number of companies, but we will get an important read on the consumer with several retail businesses reporting.

Thankfully, it will be a slow week for economic data. Monday will feature both service and composite data for PMI and ISM. Monday will also feature the Senior Loan Officer Opinion Survey. Wednesday will see consumer credit data, while Thursday will report initial jobless claims.