U.S. Stock Gold Rush | Five consecutive weekly declines come to an end; will the U.S. stock market usher in a turning point?

Ask AI · How will Middle East conflict affect the sustainability of the recent rebound in the U.S. stock market?

Despite the Middle East conflict continuing, U.S. stocks have finally posted their first weekly bullish line since mid-February this year, and investors are closely watching the conflict’s outlook.

For investors, is this merely a technical rebound after being oversold, or the start of a more enduring recovery? Next week may provide clearer clues.

Fading prospects for Fed rate cuts

Recently, U.S. data released overall has been on the positive side. Employment, retail sales, and the consumer confidence index all came in better than expected, but the Chicago PMI and the U.S. March services PMI have sounded an alarm for the economy.

In March, nonfarm payroll employment increased by 178k, recovering from February’s unexpected drop, and the unemployment rate also fell from a recent high to 4.3%. Private hiring also stabilized and rebounded: ADP employment rose by 62k in March, higher than the market forecast of 40k. The Fed’s JOLTs job vacancies fell from 7.24 million last month to 178k, though it was slightly above the forecast of 6.85 million.

On the consumption side, February retail sales rose 0.6% month over month, a clear rebound from January’s -0.1% and also above the market forecast of 0.4%. Core retail sales increased 0.5%, higher than January’s flat month-over-month and above the expected 0.4% rise. Meanwhile, the Conference Board’s consumer confidence index rose 0.8 points to 91.8 in March, beating the institutional forecast of 87.5.

The downside is that the Chicago PMI fell to 52.8 in March, below the market expectation of 54.0. The final reading of the March services PMI was 49.8, breaking back below the boom-or-bust line for the first time in three years. This week, the Atlanta Fed again lowered its near-term estimate for first-quarter GDP, from 2.0% last Friday to 1.6%. However, the market may need to wait a few more weeks to obtain economic data that includes the impact of the Middle East conflict, and then reach a conclusion.

Bob Schwartz, a senior economist at Oxford Economics, said in an interview with First Finance that although the nonfarm employment data came in above expectations, it significantly overstates the sustainable pace of job growth. The rebound after strikes ended, seasonal factors, and severe cold weather could have boosted employment growth in some industries. While the unemployment rate fell slightly, underlying subcategory data looked weak: both the labor force population and employment figures from the household survey declined. As the conflict shock leads to a softening of the labor market, the unemployment rate is expected to tick back up modestly next.

This week, yields on intermediate- and long-term U.S. Treasuries fell back from recent highs, and the yield curve became somewhat steeper. Compared with last Friday: the 2-year Treasury yield, closely tied to rate expectations, fell by about 14 basis points to 3.794%, while the benchmark 10-year Treasury yield fell by about 12 basis points to 4.305%.

Market expectations for the Fed’s next policy move remain unchanged for now. Fed funds futures pricing shows the probability of keeping the rate unchanged through December is close to 80%. At present, the probability of Fed rate cuts is not expected to break above the 65% threshold until next July.

Schwartz believes that due to the conflict, downside risks to the labor market have increased. As spending by individuals on gasoline begins to crowd out discretionary consumption, the conflict will start to affect retail from March onward. However, he leans toward the Fed ignoring the one-off inflation boost effect brought by rising oil prices and cutting rates twice within the year to guard against further weakening in the labor market.

Can the market stabilize?

After a bleak first quarter, the three major U.S. stock indexes logged the largest weekly gains in four months and ended the prior streak of six consecutive weeks of declines. Investors are looking for reasons to believe the Middle East conflict may be nearing an end.

In terms of sector performance, according to Dow Jones market statistics, the communication services sector led with a full-week surge of 6.4%, followed by the technology sector up 4.6%. Real estate, financials, and materials were also strong, with gains all exceeding 3%. Industrials, consumer discretionary, and healthcare rose more than 2%. Utilities and consumer staples edged higher. Energy was the only sector that finished down, falling 5.3% over the week.

Doug Porters, chief economist at BMO Capital Markets, said in a report: “The market is being driven by almost every bit of development in the U.S.-Iran conflict, especially every fluctuation in oil prices. This surge in oil prices has triggered a record 26% jump in retail gasoline prices in the U.S.”

It is worth noting that although near-month crude oil futures have surged sharply, with WTI crude rising to about $111 per barrel and the international benchmark Brent crude approaching about $108 per barrel, the pricing for the two oil futures’ October contracts is around $80 per barrel. This suggests the market expects any supply disruption to be temporary.

“Neither side has a clear direction right now in the stock market, but the October oil price indicates that the market believes this crisis could end before fall,” said Michael Antonelli, a market strategist at Baird.

In its market outlook, Charles Schwab wrote that another week of severe volatility has hit the stock market.

“Investors still face many unresolved questions: How long will the conflict last? How high will oil prices rise, and for how long? Will the U.S. target Iran’s energy infrastructure? Will the U.S. deploy ground troops? Ultimately, what will be the net impact on global economic growth and corporate earnings growth? The market hopes to reach a relatively peaceful solution with minimal loss of life and limited damage to the global economy, but until then, sharp volatility in the stock market and news headlines is likely to continue.” The outlook added that next week the market will receive two monthly inflation reports (the Consumer Price Index and the Personal Consumption Expenditures Price Index), but these data will likely be ignored because they are lagging indicators, and inflation is expected to rise further over the coming months due to higher energy prices.

The outlook believes that given the possibility that military strikes could escalate, it is difficult to provide further predictions when stock price movements are driven by conflict news rather than economic and technical indicators. “However, last Thursday it seemed that the first challenge to the negative correlation between the S&P 500 index and oil prices was raised—WTI crude rose 11%, while the S&P 500 index fell only 0.10%. That may be a positive signal for bulls, but if next week’s situation escalates and drives oil prices even higher, can the stock market maintain its resilience? That could become a telltale sign for the direction of the next short-term phase.”

(This article comes from First Finance)