Daily market snapshot

• Stocks rise with help from China stimulus and AI tailwinds – Equities closed higher on Thursday, as risk appetite got a boost from news that Chinese policymakers will be adding fiscal stimulus to the monetary-policy support that was announced earlier this week. China's economy and markets have been languishing of late, so the prospects of stimulus for the world's second-largest economy have boosted spirits for global equities. Markets received additional help from the tech sector, spurred by a strong quarterly report from Micron that added support to the broader AI growth story. The day's move added to stocks' gains for the week, with the S&P 500 on pace for its sixth positive week in the last seven. Elsewhere, the bond market was rather quiet today, with 10-year yields little changed. Commodities were mixed, with gold edging higher (monetary stimulus), copper prices jumping (renewed growth prospects in China), and oil prices moving notably lower (changes to the production outlook and price targets in Saudi Arabia).*
   
• Full slate of data point to a steady economy – Key reports out on Thursday aligned to the view that the economy, while decelerating from last year's pace, remains in solid shape. The final revisions to second-quarter GDP confirmed that growth held the 3% pace last quarter, as household consumption continues to hold in nicely. While that report is more a confirmation of where we've been, durable goods and employment readings released this morning indicate that we're not in the midst of a sharp drop-off. Durable goods orders came in ahead of consensus expectations, with core orders (stripping out some volatile categories) rising at the best month-on-month pace in eight months. Lastly, initial jobless claims ticked lower for the third-straight week, hitting their lowest since May. This should help further allay fears of a crumbling labor market that would bring about a more immediate economic downturn. In sum, we think this basket of data signals that employment and demand conditions are consistent with an economy that is likely moving to a lower gear but still moving forward at a speed that can validate the recent stock-market rally.
   
• Inflation data on deck – With markets riding the wave of rate-cut optimism since the Fed's meeting last week, there will be particular focus on Friday's fresh read on inflation. The release of the core PCE inflation measure – the Fed's preferred gauge of consumer prices – is expected to show a year-over-year increase of around 2.7%*, which would support the view that inflation pressures are not yet in the rearview but remain on a broader trend of moderation back toward the Fed's target. The rally in equities and drop in bond yields is pricing in a soft landing for the economy that is predicated on a string of rate cuts over the coming year. We doubt tomorrow's PCE reading will upend that narrative, but any hiccups in the inflation story would likely instigate some volatility, given the markets have baked in a fair amount of Fed policy easing. We think the Fed has shifted its focus toward the softening labor market, so policy will not dramatically shift on any single piece of data, but inflation readings over the coming months will be key for the stock and bond markets.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks finish mostly lower on Wednesday: Equity markets finished mostly lower on Wednesday, on a quiet day from a macroeconomic-headline perspective. The S&P 500 was lower by 0.2%, while the Dow posted a steeper decline of 0.7%.* At a sector level, utilities and technology were the only two sectors of the S&P 500 to close in positive territory. Energy was a laggard, declining by roughly 2% in response to a pullback in oil prices.* Overseas, Asian markets were mostly higher overnight, with Chinese equities building on yesterday's gains in response to new stimulus measures from Chinese policymakers, which included lower short-term interest rates and lower downpayment requirements for second-home purchases.* The yield curve steepened further today, with the 10-year Treasury yield ticking higher to around 3.79%, while the 2-year yield was little changed at around 3.55%.* Looking ahead, market focus will shift to inflation, with personal consumption expenditures (PCE) inflation out on Friday.
   
• Inflation in focus: Inflation data will be center stage for markets this week with the release of personal consumption expenditures (PCE) inflation on Friday. Expectations are for headline PCE to rise by 2.3% year-over-year, while core PCE is expected to rise by 2.7%.* Inflationary pressures have slowed in recent months, with the three-month annualized change in core PCE falling to 1.7% in July, the lowest reading since December 2023.* Despite declining inflation in recent months, one component of inflation that has proven stubborn over the past year has been shelter. Encouragingly, more timely indicators of rent growth, such as the Zillow Observed Rent Index, have slowed considerably from their peaks, perhaps signaling lower shelter inflation in the months ahead.* In our view, easing shelter inflation along with cooling labor-market conditions should put continued downward pressure on inflation in the months ahead.
   
• Housing market showing signs of normalization: Despite a brief period of softness from the fall of 2022 through the spring of 2023, U.S. home prices have proven resilient despite elevated mortgage rates compared with recent history. Data out yesterday showed the S&P Case-Shiller National Home Price Index rose to another all-time high in July and has risen roughly 11% since January 2023.* However, the pace of home-price gains has shown signs of slowing, with the July year-over-year gain of 5% the lowest since October 2023.* In our view, the resilience in home prices despite higher borrowing costs has been in part due to a lack of inventory of existing homes for sale. With many households locking in lower mortgage rates prior to 2022, existing homeowners have likely been reluctant to sell their homes and forfeit their existing mortgage rates. With mortgage rates declining recently, we've seen an increase in supply of existing homes for sale, which rose to the highest level since October 2020 in August.* While it sounds counterintuitive, lower mortgage rates could ease the pace of home-price appreciation in the months ahead, insofar as the lower rates incentivize additional housing inventory to the market. We'd expect home-price growth to slow but remain positive in the months ahead, perhaps rising more closely in line with wage growth, which has averaged around 4% in recent months.*

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet}

• Stocks close higher on Tuesday: Equity markets closed modestly higher across major indexes, as China released a broad package of monetary stimulus measures to help support slowing growth in its economy. The technology-heavy Nasdaq outpaced the S&P 500 and Dow Jones. For the third quarter thus far, the S&P 500 is on pace for a nearly 5% gain, bringing its year-to-date gains close to an impressive 20%*. However, over this past quarter sector leadership has shifted, as interest-rate-sensitive sectors, like utilities and real estate, lead the gains, while technology and communication services, alongside energy, have been laggards. Meanwhile, bond yields continue to diverge, with the 2-year Treasury yield continuing to drift lower as the Fed begins its interest-rate-cutting cycle, while the 10-year yield has stabilized in recent weeks. This has driven the Treasury yield curve (10-year yield minus 2-year yield) to "un-invert" and steepen, reaching its highest level of the year at around 0.19%*. 
   
• China unveils stimulus package: The Chinese central bank, People's Bank of China (PBoC), yesterday released a package of monetary stimulus measures to help support domestic consumption, as the Chinese economy has weakened in recent quarters. The PBoC cut short-term interest rates and announced plans to reduce bank reserve requirements. In addition, the central bank also announced packages to support both its flailing property market and the stock market, providing liquidity and potentially stabilization funds. Chinese markets responded positively to the barrage of policy support, with China's equity markets up over 4% on the day*. Commodity markets also rose on the news, with natural gas prices climbing about 4%*. In our view, while the stimulus measures are a positive and perhaps much-needed step to support the slowing Chinese economy, it remains to be seen if growth can materially improve with monetary stimulus alone. The economy may need fiscal support and government investment to truly turn around economic activity.
   
• Personal consumption expenditure (PCE) inflation on deck: The Fed's preferred measure of inflation, PCE inflation, will be released this Friday for the month of August. Expectations are for headline PCE inflation to fall from 2.5% to 2.3% year-over-year, while core PCE inflation is forecast to tick higher from 2.6% to 2.7%*. Keep in mind that at last week's Federal Reserve meeting, the Fed updated its own projections for PCE inflation, now calling for headline inflation to fall to 2.3% and core inflation to moderate to 2.6%*. In our view, inflation is likely to gradually continue to moderate, driven by the shelter and rent components of the inflation basket moving lower, and services inflation should continue to ease, driven in part by softening wage gains.

Mona Mahajan
Investment Strategy

^{Source: *FactSet}

• Stocks close higher: Major equity markets closed higher on Monday, as the Dow Jones Industrial Average reached a new record high. Sector performance was broad, with energy and consumer discretionary stocks leading to the upside. In global markets, Asia and Europe were mostly higher. The U.S. dollar advanced versus major currencies. In the commodity space, WTI oil was down, while gold traded higher.
   
• Key business-activity measures mixed: The S&P Flash Composite Purchasing Managers' Index (PMI) ticked lower to 54.4 in September, below expectations for 55.1*. The Services component, which represents the majority of the composite index, edged down to 55.4 but beat estimates for 55.0. The manufacturing component dropped to 47.0, below expectations for 48.5. With readings above 50.0 reflecting expanding business activity, the services sector is growing, though at a slower pace, while the manufacturing sector is contracting. We believe these trends are consistent with growth that is slowing but not collapsing, which is supportive of the "soft landing" narrative for the U.S. economy.
   
• Bond yields edge higher: The 10-year Treasury yield is up, at about 3.75%. Bond markets are currently pricing in expectations for 2.0% of Federal Reserve (Fed) interest-rate cuts over the next 12 months, which would put the fed funds rate below 3.0%**. With the Fed's dual mandates – maximum employment and stable prices – coming into better balance as the labor market gradually cools and inflation moderates, we believe the Fed is on track to continue cutting rates for the next several months. Lower interest rates should help reduce borrowing costs for businesses and consumers, which would be positive for economic growth and corporate profits.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME FedWatch}

• Stocks take a breather after the week's sprint higher: U.S. equity markets have welcomed the start of the Fed's rate-cutting cycle with open arms. Stocks were little changed on Friday, a move we'd simply characterize as markets catching their breath after the post-Fed surge this week, which included the S&P 500 topping 5,700 on Thursday for the first time ever. Coming into Friday, the stock market had rallied 5.7% in just the last nine trading days. Beyond the continued focus on the commencement of the Fed's new path for rates, there was not much in the way of headlines or data driving markets today. The utilities and consumer staples sectors led the way on Friday, reflecting a slightly defensive tone, but the bigger performance story this week has been the outperformance of cyclicals and small-caps, which have been boosted by the prospects of economic support coming from this week's decisive Fed rate cut.* 
   
• Interest rates hold steady; the yield curve is back: 10-year benchmark Treasury yields were little changed on Friday but remain higher on the week, as longer-term rates have treated the announcement of easier monetary policy as good news for economic growth ahead. Shorter-term rates have responded to both the anticipation and the confirmation of the Fed's first rate cut, with 2-year Treasury yields down a full percent (100 basis points) since July. This combination has shined some light back on the yield curve, with 10-year rates now higher than 2-year rates (known as the 10-2 yield curve) for the first time in more than two years. The return to an upwardly sloping yield curve can, to us, be viewed as a positive signal, as it reflects a mixture of easing Fed policy and a firming growth outlook. The coast is far from clear, but we think there is reason for optimism and support for an extended bull market, as history shows that instances in which the Fed is lowering rates, but a recession does not occur, has been accompanied by strong stock-market gains following the first rate cut.
   
• Looking ahead, more detail on the state of the economy: With the Fed meeting now in the books, and the next employment and inflation reports a few weeks away, markets will look to incremental incoming data to further refine the probability of a so-called "soft landing" (moderating inflation, continued economic growth), which is the prevailing view that we believe is priced in to the equity and bond markets at present. Next week will bring plenty of data points in this regard, including several manufacturing- and services-activity readouts, the latest data on the housing markets, consumer confidence, and fresh reads on household income and spending. We doubt each new piece of data will fit neatly into the soft-landing narrative, but we do believe incoming reports will largely reflect an economy that is moderating but poised for sustained expansion.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}