Market Recap – Week Ending Sept. 27

Stocks Higher; PCE Price Index Fell to 2.2% in August

Overview: Global stocks rose last week led by emerging market stocks (MSCI EM), up 6.2% on the week. In China, the central bank enacted several monetary and fiscal easing measures aimed at stabilizing the economy and stimulating growth, and the Chinese Hang Seng Index responded with a 13.0% return for the week, leading the surge in emerging market stocks. In the U.S., the S&P 500 Index recorded several all-time highs during the past week, ending the week 0.6% higher. Investors were encouraged by further progress on inflation and steady economic growth. On the inflation front, the headline personal consumption expenditures (PCE Price Index) fell to 2.2% annualized for August, as the disinflation theme continues. Meanwhile, real gross domestic product (GDP) growth was unrevised at 3.0% for the second quarter, while the Atlanta Fed GDPNow data currently estimates third-quarter growth at 3.1% as markets hope the Federal Reserve can continue to bring inflation down while avoiding a recession. Looking ahead to this week, the key economic report will be the jobs report on Friday, with the expectation for nonfarm payrolls to increase by 132,000 and the unemployment rate to remain steady at 4.2%.

Update on Interest Rates (from JP Morgan): After 26 months of inversion, the yield curve, measured by the spread between the 2-year and 10-year Treasuries, has returned to its normal upward sloping form. Since the July Jobs report, the curve has bull steepened, meaning the 2-year yield has fallen faster than the 10-year yield, causing it to un-invert earlier this month. The Federal Reserve’s recent 50-basis-point cut accentuated this move, albeit in a slightly different manner. Since the September FOMC meeting, the 2-year yield has fallen 6bps, maintaining its downward momentum, while the 10-year yield has risen 5bps. This suggests policy expectations have turned modestly more dovish, but fears of an economic slowdown have somewhat eased. Although the belly of the curve has normalized, the 3-month T-Bill still offers a higher yield than the 10-year and will likely continue to do so until the Fed cuts rates further. While an inverted yield curve is often considered a recession indicator, it’s the un-inversion that has historically signaled an impending downturn. In fact, prior to the last four recessions, the yield curve regained its positive slope after an extended period of inversion. However, this may be more coincidental than predictive, and we don’t think the U.S. economy is on the brink of recession today. Each of these prior recessions were born from either economic bubbles, unforeseen external shocks for which the yield curve would possess little predictive power, or a combination of both. While the upcoming U.S. election and elevated geopolitical tensions continue to loom over the current expansion, the cyclical sectors of the economy don’t look overextended. Despite recent shifts in the yield curve, the risk of some endogenous shock sparking a recession is low, and resilient consumer spending should support trend-like economic growth into 2025.

Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s, Bloomberg, Factset, CNBC.

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