Market volatility is back, with big swings this week

• U.S. Federal Reserve update: The Fed maintained interest rates, hinting at a possible rate cut in September.
• Economic indicators: Weak manufacturing numbers dampened market enthusiasm.

This week saw major volatility, as positive news in the tech sector and a softening U.S. Federal Reserve were counteracted by underwhelming economic data.

On Wednesday U.S. stock markets showed impressive gains. The S&P 500 rose by 1.6% but the big winner was the Nasdaq-100, which shot up by 3% thanks to positive news in the semiconductor sector. Advanced Micro Devices (AMD) had a strong performance, with its stock rising 4% after it reported solid earnings and boosted its annual chip sales forecast. Additionally, the U.S. granted exemptions to ASML and Tokyo Electron from new export sanctions to Chinese chipmakers, further boosting investor confidence. Nvidia also saw a massive boost, jumping 13% after being named a top pick by Morgan Stanley. This led to most sectors seeing gains, with tech stocks leading the way with an almost 4% increase.

Then on Thursday, the ISM Purchaser Managers’ Index (a monthly gauge of U.S. manufacturing output) came in at 46.8, significantly below expectations. This sent the market lower, erasing the previous day’s gains and then some. What looks on the surface like a calm week, was in fact a roller coaster.

However, the big story of the week was once again the U.S. Federal Reserve (the Fed). Instead of hitting the ball, they merely put it on the tee and prepared the markets for its next shot. It announced it would hold interest rates steady at 5.25% to 5.50%. Yet  changes in the Fed’s statement hinted that a rate cut could be possible in September. Unlike in June, when the Fed was primarily focused on inflation risks, the latest statement indicates a balanced approach to both inflation and employment risks. The statement acknowledged some progress toward inflation goals, an improvement from the "modest" progress mentioned previously. That is the level of nitpicking we are now at when it comes to analyzing the speeches from the Fed.

Fed Chair Jerome Powell said the job market is now back to pre-pandemic levels, calling it strong but not overheating. That is accurate when you look at the numbers. The problem is not the level, but the direction. The unemployment rate is now at 4.1%, up from 3.4% merely a year ago. Economic growth is also slowing in the U.S., as gross domestic product increased just 1.4% (annualized) in the first quarter. It was growing at 4.9% in the third quarter of 2023, so it’s hard to argue that things are not slowing down.

Listen to this week’s podcast for further insights.