In a week marked by increasing volatility, US equity indexes experienced a notable decline as fears of an economic slowdown escalated. This atmosphere of uncertainty has led to a tripling of bets on a 50 basis-point cut in interest rates anticipated for September, coinciding with a discernible rotation away from technology stocks.
The Dow Jones Industrial Average concluded the week at 39,737.26, reflecting a decrease from 40,589.34 the previous week. Similarly, the Nasdaq Composite ended at 16,776.16, down from 17,357.88, while the S&P 500 closed at 5,346.56 compared to 5,459.10 a week earlier. This decline encompasses both weekly and monthly observations, indicating the tech sector has been particularly hard hit.
Among the driving forces behind the tech decline are underwhelming quarterly results from major players. Intel ($INTC) and Arm Holdings ($ARM) reported disappointing figures, while Microsoft ($MSFT) also struggled to impress investors. Furthermore, Amazon ($AMZN), another pillar of the technology sector, failed to meet expectations, contributing to the sector's overall poor performance.
Simultaneously, Treasury yields fell sharply, with the 10-year yield settling at 3.8%, the lowest it has been since December, and the two-year rate at 3.88%, the weakest since January. This decline can be attributed to disappointing macroeconomic data that has adversely affected risk sentiment in the markets.
July's nonfarm payrolls increased by just 114,000, well below the consensus estimate of 175,000 compiled by Bloomberg. The previous months' job gains were also revised downward, with June seeing a reduction of 27,000 and May adjusted by 2,000. Additionally, the unemployment rate edged higher in July, adding to the concerns surrounding the economy.
Further complicating the economic landscape, the Institute for Supply Management's manufacturing index unexpectedly dropped, indicating a deeper contraction in the sector. Compounding these issues, US weekly initial jobless claims surged beyond forecast levels, hitting their highest point in a year, as noted by D.A.
Davidson. Morgan Stanley has indicated that they continue to anticipate three rate cuts throughout this year, with the first expected in September. Their perspective is supported by core PCE forecasts projecting a three-month annualized inflation rate of 2.1% ahead of the upcoming Federal Reserve meeting.
They assert, "Inflation continues to move convincingly lower, and the Fed is poised to cut rates in every meeting through mid-2025." The CBOE's Volatility Index (VIX), often referred to as the fear gauge, saw an impressive surge of 25% after market hours. During intraday trading, it reached a 52-week high, coinciding with the CME Group's FedWatch Tool showing a 72% probability of a 50 basis point cut, a significant increase from just 22% the day prior.
In summary, the confluence of rising volatility, disappointing earnings, and precarious economic indicators paints a challenging outlook for US equity markets as investors brace for potential monetary easing in the near future..