[New York Stock Market] September Interest Rate Cut Outlook Drives Broad Gains... Dow and S&P Hit New Highs Again

Small and Mid-Cap Stocks Rally... Russell 2000 Index Up 3.5%
Interest Rate Futures Market Fully Priced for September Cut
June Retail Sales Exceed Expectations... Rate Cut Hopes Remain Strong

The three major indices of the U.S. New York stock market all closed higher on the 16th (local time). Following Federal Reserve (Fed) Chair Jerome Powell's 'dovish (preference for monetary easing)' remarks the previous day, expectations for a rate cut in September gained momentum, expanding the rally from tech stocks to small- and mid-cap stocks. The June retail sales data also exceeded expectations, spreading hopes for a soft landing of the U.S. economy and stimulating buying momentum.

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On the day at the New York Stock Exchange (NYSE), the blue-chip-focused Dow Jones Industrial Average rose 742.76 points (1.85%) from the previous trading day to close at 40,954.48, marking a record high for the second consecutive day. The daily gain was the largest since June 2023. The large-cap-focused S&P 500 index also rose 35.98 points (0.64%) to 5667.2, setting an all-time high. The tech-heavy Nasdaq index closed at 18,509.34, up 36.77 points (0.2%).

By individual stocks, Bank of America (BoA) and Morgan Stanley rose 5.3% and 0.84%, respectively, after reporting earnings that exceeded market expectations. BoA stated that net interest income is expected to increase through the end of the year. As expectations for rate cuts led to a rotation from large-cap to small- and mid-cap stocks, the Russell 2000 index, which focuses on small- and mid-cap stocks, rose 3.5%, extending its five-day consecutive gain. Meanwhile, Nvidia fell 1.62%.

Ross Mayfield, an investment strategist at Baird, analyzed, "There is a rotation trade pattern unfolding from large tech stocks to small caps and then to average stocks, creating a lot of momentum."

Expectations for a rate cut in September are driving investor sentiment. Chair Powell said in a conversation with David Rubenstein, chairman of the U.S. private equity firm Carlyle Group, at the Economic Club of Washington D.C. the previous day, regarding the easing of inflation, "We did not gain additional confidence in the first quarter, but three indicators from the second quarter (April to June) somewhat increased our confidence." He added, "Now inflation has declined, and the labor market has actually cooled," emphasizing, "We will look at both, and these two are in a much better balance."

The market is treating the possibility of a rate cut in September as a given. According to the Chicago Mercantile Exchange (CME) FedWatch on the day, the federal funds futures market fully priced in a more than 0.25 percentage point rate cut by the Fed at the September Federal Open Market Committee (FOMC) meeting, up from 61.5% the previous day. The probability of a 0.5 percentage point or more cut in November is priced at 67%, and the chance of a 0.75 percentage point or more cut in December is priced at 60.9%.

The retail sales data, which exceeded expectations on the day, did not dampen rate cut expectations. According to the U.S. Department of Commerce, retail sales last month were $704.3 billion, holding steady compared to the previous month ($704.5 billion). The market had initially forecast a 0.3% decline but the actual figure surpassed expectations. In May, retail sales had increased by 0.3%. Retail sales excluding automobiles and gasoline rose 0.8%, marking the largest increase since 2023. This exceeded both expert forecasts (0.2%) and May's figure (0.3%). This trend differs from the recent slowdown in consumption due to high interest rates and a cooling labor market. However, it is interpreted as meaning that the U.S. economy is still holding up, raising market expectations for a soft landing.

Brett Kenwell, a U.S. investment analyst at eToro, said, "Seeing strong retail sales data is positive, even if it brings short-term volatility to rate cut expectations," adding, "It is much better to see rate cuts as inflation declines rather than the Fed lowering rates to support a weakened economy."

Rubila Faruqi, chief U.S. economist at High Frequency Economics, diagnosed, "Consumption and economic activity have slowed considerably so far this year," but noted, "The situation has not deteriorated enough to be considered a recession." She further forecasted, "The combination of improved spending, growth indicators, and inflation data is likely to support monetary easing."

The market is expected to digest corporate earnings reports while watching the Republican National Convention this week. The previous day, the Republican Party officially nominated former President Donald Trump as its presidential candidate. The Republican vice-presidential candidate was decided as Senator J.D. Vance (Ohio).

U.S. Treasury yields are declining. The 10-year U.S. Treasury yield, a global benchmark for bond yields, fell 7 basis points (1 bp = 0.01 percentage point) from the previous trading day to 4.15%, while the 2-year Treasury yield, sensitive to monetary policy, dropped 3 basis points to 4.42%.

International oil prices fell due to concerns over weakening demand from China, the largest oil importer. West Texas Intermediate (WTI) crude oil closed at $80.76 per barrel, down $1.15 (1.4%) from the previous day, and Brent crude, the global oil price benchmark, closed at $83.73, down $1.12 (1.3%).