U.S. equity markets rebounded sharply last week on the back of healthy labor market and retail sales data alongside falling inflation reports that put soft landing expectations back in focus for investors. The S&P 500 posted its best weekly advance since October 2023 with a 3.9% gain and broke a four-week streak of consecutive declines. Meanwhile, the tech heavy Nasdaq Composite surged by 5.4% and the Dow Jones posted a 3.0% return. While the information technology sector topped the leaderboard with a 7.6% rise, all 11 economic sectors ended the week in positive territory. Consumer discretionary stocks climbed 5.3% with support from encouraging data on the health of the U.S. consumer. Defensive sectors like utilities and real estate posted more modest gains.

Heading into last week, stocks were already trending upward following August 8's reading on initial jobless claims, which showed their largest weekly decline since September last year. That had helped calm recession concerns after the July jobs report sparked widespread concern over the health of the economy earlier this month. Those concerns were further allayed last week, as unemployment insurance claims continued to recede and retail sales came in well above expectations, growing 1.0% month-over-month in July compared to consensus for 0.3% growth and June’s -0.2% decline in sales.

Meanwhile, last week’s July inflation data was also well received as both the consumer and producer price indices cooled more than anticipated. CPI slowed to 2.9% year-over-year (3.2% excluding food and energy prices) compared to the expectations and the prior month level of 3.0%, and PPI dropped from 2.7% year-over-year in June to just 2.2% in July. Rent price inflation remained a sticking point and ticked up last month, but disinflation elsewhere should provide enough support for a rate cut at the September Federal Reserve meeting.

At this point the question for the September Fed meeting is not if the central bank will cut rates but to what degree. With the favorable economic data, market participants have dialed back their expectations for an aggressive 50 basis point rate cut by the Federal Reserve at its meeting in September. According to the CME Fedwatch tool, the market is now assigning a 75% probability to a 0.25% rate cut and 25% odds of a 0.50% cut. The odds were split 50/50 heading into last week.

Second quarter earnings season is winding down, but there are still some major names scheduled to report their results ahead, including retailers Target and TJX, cybersecurity firm Palo Alto Networks, and China's largest search engine provider Baidu this week. Last week, home improvement retailer Home Depot cut its annual comparable sales guidance as large renovation projects remain under pressure from higher interest rates, and Applied Materials, the biggest U.S. semiconductor equipment maker, announced results that showed a moderation in China demand.

The spotlight this week will be on the Federal Reserve's Jackson Hole symposium from August 22 to 24. Organized by the Kansas Fed, the symposium is one of the longest-standing central banking conferences in the world. The event will bring together economists, financial market participants, and U.S. government representatives to discuss long-term policy issues of mutual concern. Traders will be paying close attention to the speakers at the event, including Fed chief Jerome Powell, for any comments on monetary policy easing.

Also on the economic calendar is an update on new home sales and the minutes of the Fed's July monetary policy committee meeting. On the housing front, a federal settlement with the National Association of Realtors — in which sellers no longer need to pay buyers’ commissions and commission splits are no longer allowed to be advertised on online databases — went into effect this past weekend. Buyers and brokers alike said they were unsure just how the new system works.