U.S. Labor Market and Stock Volatility
Recent developments show that the earlier panic over U.S. employment data might have been exaggerated. Stocks have nearly recovered from last week's losses, as volatility indicators have returned to more typical levels. This recovery included a significant 2.3% increase on Thursday, the best single day in over 18 months, reducing the week's loss to a modest 0.5%.
The volatility gauge, a measure of how much the stock market is expected to fluctuate, and Japan's yen have both stabilized. The volatility gauge is now close to its long-term average, and the yen has settled at just above 147 per dollar. The primary catalyst for this was an unexpected drop in weekly U.S. jobless claims, which shifted the narrative from fears of massive job losses to increased labor force participation and temporary factors like weather.
Federal Reserve and Interest Rate Expectations
As we look ahead, focus turns to the upcoming U.S. inflation report. The futures market is debating whether the Federal Reserve will cut interest rates by a quarter or a half point next month, with 38 basis points of easing expected in September and 100 basis points over the rest of the year. Treasury yields have decreased, with the 10-year yield falling below 4%.
Federal Reserve officials, including Richmond Fed President Thomas Barkin, express optimism that inflation is cooling sufficiently to allow for rate cuts. Barkin notes that inflationary pressures seem to be abating, which supports future interest rate reductions.
Stock Market Performance and Corporate Earnings
Before the market opened on Friday, major U.S. stock index futures were up by 0.5% to 1%. Despite some erratic movements during the earnings season, the S&P 500's annual profit growth is tracking at 13.8% for Q2, surpassing earlier forecasts. A standout performer was Eli Lilly, which saw nearly a 10% increase in its stock after reporting that its weight-loss drug sales exceeded $1 billion in a single quarter for the first time.
Global Economic Indicators
Turning to global economic indicators, China's deflation concerns have eased slightly, with consumer prices rising by 0.5% last month, exceeding expectations. However, persistent deflation in Chinese producer prices could have broader implications for global inflation.
Following Wall Street's rally, stocks in Europe and Japan also rose, with Japan's market ending the week just over 2% down after a substantial fluctuation earlier in the week. Conversely, China's main stock index closed slightly lower.
Corporate Deals and U.S. Political Climate
In corporate news, British investment platform Hargreaves Lansdown has agreed to a £5.44 billion takeover by an international consortium, reflecting the competitive nature of the UK wealth management industry.
In U.S. politics, former President Donald Trump has suggested granting U.S. presidents influence over Federal Reserve decisions, a move that could challenge the central bank's independence if he returns to power. Meanwhile, polls indicate that Vice President Kamala Harris is leading Trump in key states, and betting markets give her a 57% chance of winning the presidential election.
Upcoming Economic Reports and Earnings
For Friday, eyes will be on Canada's July employment report and June industrial output, along with U.S. corporate earnings from companies such as AMC Networks, Evergy, EchoStar, and others.
