Over the past week, markets have bounced back from the previous sharp downturn, with the S&P 500 surging over 6.5% since its August 5 lows, and the tech-centric NADSDAQ climbing more than 8%.

Two main factors are driving this renewed positive sentiment. First, inflation continues to cool, with both the consumer price index (CPI) and producer price index (PPI) for July coming in below expectations.

Second, economic indicators remain strong, with retail sales and jobless claims exceeding forecasts. These trends suggest that while the U.S. economy may be slowing, it is not on the brink of a significant downturn or recession.

During this heated election season, political demagogues warning of a market crash and economic depression may want to revise their campaign playbook. It’s a losing campaign strategy.

All signs point to an interest rate cut by the Federal Reserve at its forthcoming September 17-18 Federal Open Market Committee (FOMC) meeting. The Jackson Hole Symposium (August 22-24) also will be closely monitored. Fed Chair Jerome Powell and his team will probably use this event to signal a rate reduction.

After a series of concerning inflation reports in the first quarter of the year, inflation metrics have started to decline, surprising on the downside. Last week’s data continued this trend, with both PPI and CPI inflation coming in below expectations for July.

The headline CPI is now at its lowest point this year, while headline PPI inflation was recorded at 2.2% annually, slightly below the forecast of 2.3%. Similarly, headline CPI inflation came in at 2.9%, just under the expected 3.0%.

Overall, the inflation data released this week is a positive development for both consumers and the inflation fighters at the Fed, bringing us closer to the Fed’s 2.0% target for personal consumption expenditure (PCE) inflation.

In fact, the Fed’s own now-casting model suggests that headline PCE inflation could fall below 2.6% for July, with core PCE inflation (excluding food and energy) likely to also hit 2.6%. Both of these figures are at or below the Fed’s forecasts from its June meeting, which projected headline PCE at 2.6% and core PCE at 2.8% by year-end.

The following chart throws cold water on the bears:

One factor behind the early August market sell-off was the growing concern that the U.S. economy might be heading toward a recession. The July nonfarm payroll report, which showed slower job growth and a higher-than-expected unemployment rate of 4.3%, was particularly worrisome.

However, since then, a series of stronger economic data points have emerged, suggesting that while the economy may be cooling, it is not facing an imminent recession.

Among the most notable data was last week’s retail sales report, which highlighted a healthy and active U.S. consumer. Monthly retail sales growth came in at 1%, well above the expected 0.4% and last month’s -0.2%.

Later in the week, the University of Michigan’s consumer expectations index came in at 72.1, beating forecasts of 68.5. Both sets of data indicate that U.S. consumers are still spending and remain relatively optimistic about the future.

Another important metric, released weekly, is U.S. initial jobless claims, which provide a real-time glimpse into the labor market’s health by tracking those filing for unemployment benefits.

The good news is that jobless claims, which peaked at 250,000 two weeks ago, have since steadily declined, most recently reaching 227,000. This has eased investor fears of a spike in jobless claims and a rapidly deteriorating labor market. As we move into the latter half of the third quarter, the jobs data appears to be stabilizing.

On Monday, the main U.S. stock market indices extended their winning streak and closed higher as follows:

• DJIA: +0.58%
• S&P 500: +0.97%
• NASDAQ: +1.39%
• Russell 2000: +1.19%

The S&P 500 and NASDAQ posted their eighth straight positive day, a first for both indices in 2024. So much for the “Kamala crash.”

The week ahead…

Keep an eye on the following economic reports and events, scheduled for the coming days:

U.S. leading economic indicators (Monday); minutes of the Fed’s July FOMC meeting (Wednesday); initial jobless claims, S&P flash U.S. services and manufacturing PMIs, existing home sales (Thursday); new home sales (Friday).

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John Persinos is the editorial director of Investing Daily.

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