Payrolls regain crown as most important data release for stocks

The second estimate of U.S. GDP growth for the second quarter surprised on the upside, showing a robust 3.0% quarter-over-quarter annualized rate.

According to Bank of America (NYSE:BAC) strategists, the stronger-than-expected growth was primarily driven by a notable increase in consumption, which rose by 2.9% compared to the previously reported 2.3%. However, most other major categories were revised downward.

"The economy continues to disprove skeptics,” strategists note. “Growth has certainly cooled relative to last year, but it has done so at a gradual pace."

July's personal spending data further supports this view, showing a solid 0.5% month-over-month increase in nominal terms. Meanwhile, the core Personal Consumption Expenditures (PCE) index remained flat for the month, ticking up 0.2% month-over-month and 2.6% year-over-year.

"Overall, this report is another step in the right direction and is consistent with a soft landing,” BofA continued.

“Both income growth and spending are running at/above trend, while inflation has moderated over the last few months." Although the savings rate appears low, strategists suggest that this could increasingly represent a new normal.

Looking ahead, the focus shifts to the upcoming nonfarm payrolls (NFP) report, which is expected to bolster the view that the Federal Reserve will implement a rate cut in September.

"NFP has regained its crown as the most important data release for stocks,” BofA’s team emphasized.

Ahead of it, Fed funds futures are pricing in a substantial 100 basis points of cuts for the remainder of 2024, indicating a "recession-sized" adjustment. Despite concerns about a potential recession, equities have rallied, approaching near highs, with small caps and the equal-weighted S&P showing strong performance.

The primary risk for equities this week, according to BofA, is a hotter-than-expected NFP report that could drive short-term rates higher.