U.S. stocks rose Friday, lifting the S&P 500 to its first record close since January 26, as Federal Reserve Chair Jerome Powell laid out a fairly benign strategy of monetary tightening but not enough to throw the economy off kilter.
The S&P 500 ended the week at 2874.69, up 0.9% for the week and about two points higher than its previous record close. The Dow gained 0.5% while NASDAQ rose 1.7%. Other stock indexes also closed at record highs. Foreign stocks were likewise higher.The Stoxx Europe 600 was up a modest 0.7%, its first weekly gain in four weeks. The dollar was weaker, as the euro jumped sharply, up 1.6% to more than $1.16, its biggest weekly gain since January. Chinese stocks rebounded, continuing this month’s sharp up-and-down pattern. The Shanghai composite gained 2.3% while Hong Kong’s Hang Seng index rose 1.7%. Over the past four weeks the two indexes have gained about 2% one week only to lose double that the next.
Powell made some positive comments about the U.S. economy but showed less worry about inflation, which could mean more gradual increases in interest rates. “There is good reason to expect that this strong [economic] performance will continue,” he said at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming. Regarding inflation, he noted that “while inflation has recently moved up near 2%, we have seen no clear sign of an acceleration above 2%, and there does not seem to be an elevated risk of overheating.” The Fed has to balance “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating,” Powell said. “I see the current path of gradually raising interest rates as the approach to taking seriously both of these risks.” The minutes of the Fed’s July 31-Aug. 1 meeting, which were also released last week, indicated that the Fed is likely to raise the federal funds rate another quarter percentage point at its next meeting in late September.
Long-term Treasury bond prices rose and yields fell following Powell’s remarks. The benchmark 10-year note ended the week at 2.81%, down five basis points on the week; the yield is down nearly 20 bps since a recent peak of 3.00% on August 1. The 30-year bond closed at 2.96%, down six bps. At the other end of the spectrum, the three-month bill rose five bps to 2.10%. Oil prices gained more than 4% on the week, their first weekly gain since the end of June.
Economic reports for July released last week were mostly weaker than expected. Durable goods orders were skewed downward by the aircraft category, as they often are, but the underlying report was stronger. The headline number showed a 1.7% drop from June, well below the consensus forecast of a 0.8% decline and down from the previous month’s 0.7% gain. But excluding the usually volatile transportation sector, orders were up 0.2%. More importantly, perhaps, spending on core capital goods, a measure of business investment, jumped 1.4%, the biggest increase since April and well above expectations of a 0.5% gain and the prior month’s 0.6% rise. Sales of both new and existing single-family homes were weaker in July. Sales of previously-owned homes, by far the largest category, fell 0.7% to annual rate of 5.34 million units, their fourth straight monthly decline; the Street was expecting a 0.6% increase. Home prices rose another 4.5% compared to a year earlier to a median $269,600. New home sales fell 1.7% to an annual rate of 627,000 units, the lowest level since last October; analysts were expecting an increase.
Reports/dates/facts/links worth paying attention to over the next week:
1. August 27: Chicago Fed national activity index for July.
2. August 28: S&P Corelogic Case-Shiller home price indexes for June; Conference Board consumer confidence index for August.
3. August 29: Second quarter GDP, first revision; pending home sales for July.
4. August 30: Weekly unemployment claims; personal income and outlays for July.
5. August 31: University of Michigan consumer sentiment index for August, second reading.