[Chart courtesy of MarketWatch.com]

1. Moving the markets

The market was a roller coaster today, but the major indexes still managed to end the month on a high note, even though the Fed has not ruled out further rate hikes.

The S&P 500 gained 2.9% and posted its fifth consecutive positive month for the first time since August 2021. Investors seem to be optimistic about a smooth economic recovery, as recent data shows strong job growth and easing inflation. The second-quarter earnings also beat the low expectations.

However, this rally was driven by only 7 of the S&P 500 stocks, so the rest of the market was not as lucky. That’s why traders are eagerly waiting for Amazon and Apple to report their earnings on Thursday, which could make or break the market mood.

Last week, the Fed increased rates by a quarter-point, to the highest level in more than 22 years. Fed Chair Jerome Powell said the Fed will act based on data, not predictions, but he also hinted that rate cuts are not likely anytime soon.

The US Economic Surprise Index rose for the third month in a row and reached its highest level since March 2021. So much for the landing scenarios. Maybe we are flying high…

Of course, part of the reason for the July surge were some massive short-squeezes, which sparked the biggest 3-month rally since March 2021.

Bond yields were mixed, with the 10-year failing to break above 4% twice. The dollar dropped for the second month in a row but bounced back from its mid-month low.

But one thing that could spoil the inflation party was Crude Oil, which had its best month since January 2022, as it almost hit $82. This could push up the CPI numbers in the future.

Gold also shone brightly, with its best month since March and a 3% gain. It also reclaimed the $2k level again.

Despite the bullish mood on Wall Street, the S&P 500 is way out of sync with high yield bonds, which makes me wonder when this gap will close.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Dow Jones Industrial Average was on a roll this week, hitting new highs on hopes of a strong economy, tame inflation and solid earnings. But the party came to an abrupt halt on Thursday, when the index reversed course and plunged into the red. What happened?

One culprit was Honeywell, whose shares dropped after the company reported lower-than-expected revenue and cut its full-year outlook. Another was the 10-year Treasury yield, which jumped above 4% for the first time since 1999, spooking investors who fear higher borrowing costs and lower profits.

But the main trigger for the sell-off was a rumor that Japan might adopt a policy of yield curve control (YCC), which means capping long-term interest rates by buying bonds. This sent the dollar tumbling against the yen, which in turn pushed up the US bond yields.

The irony is that the US economy is actually doing quite well, as evidenced by the latest data. The second-quarter GDP growth came in at 2.4%, beating expectations and showing no signs of a recession. The inflation gauge also eased to 2.6%, down from 4.1% in the first quarter. And Meta Platforms, formerly known as Facebook, posted stellar results and guidance, lifting its shares by 5%.

The Federal Reserve also seemed to strike a balanced tone on Wednesday, when it raised its key interest rate to 5.25%, the highest level in 22 years. Fed Chair Jerome Powell said the central bank could either hike or pause depending on the data, leaving some room for flexibility.

But none of that mattered to the market on Thursday, as investors focused on the rising bond yields and the potential impact on corporate earnings and valuations.

Precious metals also took a hit, as gold and silver prices fell sharply after the strong GDP report. The data suggested that the Fed’s tightening campaign has not slowed down the economy as much as expected, raising the possibility of more rate hikes in the future.

So, what’s next for the market? Will it bounce back or continue to slide? That may depend on how the bond market behaves, and whether Japan will indeed adopt YCC or not. Stay tuned for more updates.

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[Chart courtesy of MarketWatch.com]

1. Moving the markets

The Fed finally raised the interest rate by 0.25%, as everyone expected. The markets cheered at first, but then realized that the party was over and went back to their gloomy mood. Only the Dow managed to stay positive by a hair.

The problem was that the Fed didn’t sound too confident about its own decision. Powell kept saying that the Fed would “do more” if needed, and that it would watch the data closely before making any more moves.

He also hinted that the Fed might have gone too far or too fast with its tightening policy, and that inflation was still nowhere near its 2% target. But the data didn’t really support the Fed’s actions.

The unemployment rate was the same as it was a year ago, when the Fed started hiking. The financial conditions were easier than they were last fall when the Fed was supposed to be tightening. And the S&P 500 was back to where it was when the whole thing began.

So, what did the Fed achieve? Nothing much, except pushing commodity prices higher, which was not what it wanted. Powell tried to cover all his bases with these statements:

• *POWELL: FOMC TO TAKE DATA-DEPENDENT APPROACH ON FUTURE HIKES

• *POWELL: WILL CONTINUE TO MAKE DECISIONS MEETING BY MEETING

• *POWELL: POSSIBLE WE’D RAISE OR HOLD IN SEPT. IF DATA WARRANTED

• *POWELL: AS STANCE IS MORE RESTRICTIVE, INCREASINGLY FACE RISK

• *POWELL: POLICY NOT RESTRICTIVE ENOUGH FOR LONG ENOUGH

• *POWELL: IDEA OF HIKING RATES UNTIL INF. AT 2% IS WAY PAST TARGET

• *POWELL: DON’T SEE INFLATION BACK AT 2% UNTIL ABOUT 2025

But the markets were not impressed. They saw through his bluff and shrugged off his words. The day ended with little change in most indexes, except for Google and Microsoft, which moved in opposite directions after reporting their earnings.

Google beat expectations and soared 5.8%, while Microsoft disappointed with slower cloud growth and fell 3.7%.

The 10-year bond yield and the dollar both dipped slightly, giving a boost to precious metals.

Meanwhile, billionaire Thomas Peterffy had a different view from Wall Street:

“The market should be much lower. US soft landing is wishful thinking.”

Maybe he knows something we don’t?

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