[Chart courtesy of MarketWatch.com]

1. Moving the markets

The stock market had a roller-coaster ride on Thursday, as an early rally fizzled out and left only the Nasdaq in the green. The other two major indexes closed slightly lower, snapping a 4-day winning streak. The month of August was a bumpy one for stocks, as the S&P 500 trimmed its losses from nearly 5% to less than 2%. Small caps suffered the most, as they usually do in turbulent times.

Inflation remained a hot topic, as the Fed’s preferred measure, the Core PCE Deflator, rose to 4.2% year-over-year in July, matching expectations but higher than June’s 4.1%. The headline PCE also jumped to 3.3%, the highest since June 2022. But if you take out the housing component, which accounts for a large chunk of consumer spending, inflation is still stuck at elevated levels, as this chart shows.

Bond yields were initially falling, which boosted stocks, but then reversed course and started to climb, which dragged stocks down. It seems that stocks are following bonds closely these days, so lower yields could mean higher stock prices in the near term.

The labor market showed mixed signals, as initial jobless claims dropped to 2023 lows despite a surge in layoffs, but continuing claims rose above 1.7 million last week. The economic recovery seems to have hit a speed bump in August, as various indicators showed the biggest monthly decline since May 2022. The data was also inconsistent, with some measures showing strength and others showing weakness.

The dollar had a strong month, rising the most since February, but has been trading sideways for the last two weeks. The Fed has been talking tough about tapering and hiking rates, but the market is not buying it. The market is pricing in 1.1% of rate cuts by the end of next year, which could be a big mistake if the Fed follows through on its hawkish rhetoric.

The bottom line is that the market is facing a lot of uncertainty and volatility, and we need to be prepared for more swings ahead.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The stock market seems to be living in a paradox these days. Weak economic data, which usually spells trouble for equities, has been boosting them instead. Why? Because investors are hoping that the Fed will ease its monetary policy in response to the slowdown.

On Wednesday, traders got another dose of bad news. ADP reported that private employers added only 177k jobs in August, much lower than the revised 371k in July. This signaled a cooling off in the labor market and lowered the expectations of a rate hike.

Meanwhile, the annual GDP growth rate was also revised down to 2.1% from 2.4%, adding to the gloomy picture of the economy.

This was the second day in a row that investors shrugged off poor economic data and pushed stocks higher. On Tuesday, the major U.S. indexes rallied after disappointing consumer confidence figures and a sharp drop in job openings for July. This sparked hope that the Fed could be more dovish in its upcoming meetings.

Some analysts call this a ‘bad news is good news’ environment, which tends to happen when investors are worried about rates and Fed policy. Any softness in economic data reduces the upward pressure on yields, and that helps equities.

But this paradoxical situation may not last long, as Bloomberg’s Simon White noted. He pointed out the divergence between the S&P 500 index and the Leading Economic Index, which measures future economic activity. The S&P 500 has been rising while the LEI has been falling, suggesting that stocks are out of sync with the recession risks.

The bond market also showed signs of volatility, as yields swung wildly but closed lower on Wednesday. The dollar weakened again, giving a boost to gold prices.

So, what does this all mean for us trend followers?

It means that we need to be cautious and prepared for any surprises. The market may be enjoying the bad news for now, but it may not be able to ignore reality for long.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The markets tried to shake off their August blues by betting on bad news. The Labor Market showed signs of a slowdown, with fewer job openings and lower revisions. The US Macro Data index also dropped for eight days in a row.

Some analysts feared a hard landing recession, but Wall Street traders saw a silver lining: the Fed might cut interest rates sooner and more aggressively. The hopes for lower rates were boosted by falling bond yields and weak Consumer Sentiment data. The market expectations for Fed rate changes reversed course and ignored Powell’s hawkish stance.

The rally was also fueled by a short squeeze, as the bears had to cover their positions. Nvidia soared above its pre-earnings highs before losing some steam. The dollar took a dive and posted its biggest loss since mid-July. Gold shone and jumped almost 1%.

I think the market volatility in August is not over yet, and I expect more swings in September as the market adjusts to a slower economy. The Fed’s past rate hikes have taken their toll on the economy, especially on the housing market, which faces higher mortgage rates.

[Chart courtesy of MarketWatch.com]

1. Moving the markets

The markets shrugged off Powell’s hawkish speech at Jackson Hole and rallied on Monday, boosted by a massive buy-program in the final hour. Powell reiterated that the Fed is ready to raise rates further if needed, but also said that it would be careful, and data driven.

Lagarde, the ECB chief, echoed her cautious tone and did not hint at any imminent rate hike. Traders are now looking ahead to some key economic indicators later this week, such as the PCE inflation index on Thursday and the non-farm payroll report on Friday.

These data points could influence the Fed’s decision on when to start tapering its bond purchases and raising interest rates. The market action on Monday was also driven by a short squeeze in some stocks, such as Nvidia, which recovered from an early drop.

Bond yields were mixed, with the 2-year yield briefly topping 5.1% before settling above 5%. The dollar was flat, while gold rose to a 3-week high. The volatility is likely to continue as traders brace for more news on the economy and monetary policy.