Most of the major indices closed this volatile week little changed. The S&P 500 was almost flat on the week, the Nasdaq declined 0.2%, the Dow Jones Industrial Average settled 0.6% lower, and the Russell 2000 underperformed, dropping 1.4%. The week started with a continuation of the global sell-off that began last week on fears about US economic growth following last Friday’s jobs report. Japan’s Nikkei slumped 12% on Monday, precipitating a big sell-off in US equities. This huge downturn was related to an unwinding of the yen carry trade as the yen strengthened rapidly against the dollar. The market was concerned about the unwinding of the yen carry trade given how entrenched it had become with Japan holding rates below zero, or near zero, for so long.
The market was also concerned about the U.S. economy slowing more quickly than it had previously believed it would. The thinking was that instead of the preferred scenario in which the Fed lowers interest rates because inflation was back in-line, it would be forced into cutting because of a weakening economy. It would be an admission that the Fed had made a policy mistake by keeping rates high for too long and had damaged the economy.
Monday’s sharp moves lower had the S&P 500 flirting with correction territory (defined as a 10% decline from its recent high). On Tuesday, the fears of the yen carry-trade unwinding settled down and the Nikkei jumped over 10% as the yen weakened against the dollar. Additionally, some positive economic data points signaled that perhaps the US economy was not weak as some investors were fearing. The Atlanta Fed GDP estimate for the third quarter was 2.9% in the latest estimate, up from 2.5%. The weekly jobless claims report, which showed initial claims decreasing by 17,000 to 233,000, supported the notion that concerns about a recession were overblown.
Interest rates initially moved markedly lower early in the week but then rallied as recession fears moderated. The 10-yr note yield rose 15 basis points to 3.94% and the 2-yr note yield jumped 18 basis points to 4.05%.