Stocks ended a volatile week on a positive note, as investors welcomed the signs of easing pressure from oil prices and bond yields. The S&P 500 (^GSPC) rose about 0.6%, while the Dow Jones Industrial Average (^DJI) rose about 0.3%. The tech-heavy Nasdaq Composite (^IXIC) led the gains, rising 0.8%.
Oil prices retreat from 2023 highs
One of the main drivers of the market turbulence this week was the surge in oil prices, which hit fresh 2023 highs on Wednesday and threatened to fuel inflation and hurt consumer spending. However, on Thursday, oil prices pulled back from their peaks, as West Texas Intermediate futures (CL=F) fell under $92 a barrel after topping $95 earlier in the morning. Brent crude futures (BZ=F) also declined, trading lower around $95, having neared $97 in the session.
Some analysts attributed the oil price retreat to profit-taking, technical factors, and expectations of higher supply from OPEC and its allies. Others pointed to the potential impact of the U.S. strategic petroleum reserve release, which President Joe Biden announced on Wednesday. The U.S. will release 50 million barrels of oil from its emergency stockpile, in coordination with other major oil-consuming countries, to ease the supply crunch and lower prices.
Bond yields cool off after Fed signals
Another source of market anxiety this week was the rapid rise in the 10-year Treasury yield (^TNX), which climbed to 4.6% on Wednesday, the highest level since 2021. The spike in yields reflected the market’s anticipation of tighter monetary policy from the Federal Reserve, which signaled last week that it would start tapering its bond-buying program in November and could raise interest rates as soon as next year.
However, on Thursday, the 10-year yield eased slightly, settling around 4.5%. Some analysts said the bond market was taking a breather after the sharp move, while others cited the weaker-than-expected economic data that cast some doubt on the strength of the recovery. The second estimate of the U.S. gross domestic product (GDP) for the second quarter came in unchanged at 2.1%, below the consensus forecast of 2.2%. The pending home sales index for August also disappointed, plunging 7.1% month-over-month, compared to a 0.9% increase in July.
Stocks look ahead to PCE inflation data
Despite the headwinds from oil and yields, stocks managed to bounce back on Thursday, recouping some of the losses from the previous sessions. Some sectors that had been under pressure, such as technology, consumer discretionary, and communication services, outperformed the broader market, while energy, financials, and materials lagged.
Investors are now looking ahead to Friday’s release of the personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation. The PCE index is expected to rise 0.3% month-over-month in August, and 4.2% year-over-year, slightly lower than the 4.3% annual increase in July. However, the core PCE index, which excludes food and energy, is projected to rise 0.3% month-over-month and 3.6% year-over-year, unchanged from July.
The PCE inflation data will be closely watched by the Fed and the market, as it could have implications for the timing and pace of the Fed’s policy normalization. The Fed has maintained that the current inflation spike is transitory, and that it will tolerate a moderate overshoot of its 2% inflation target. However, if inflation proves to be more persistent and broad-based, the Fed may have to act sooner and more aggressively to rein it in, which could roil the markets.