Stock investors have been focusing on the latest economic reports to gauge the Federal Reserve's near-term monetary policy decisions. The central bank's recent actions and statements suggest a softening of its inflationary stance, with Fed Chair Jerome Powell indicating that price pressures may have eased but are still not at a satisfactory level. The Fed's preferred inflation measure remains above its 2% target, as stated at the conference in Jackson Hole in late August.
The labor market showed signs of cooling down in August, leading to speculation that the Fed is largely done with hiking interest rates. The jobless rate increased to 3.8% in August, exceeding analysts' predictions that it would remain at a multi-decade low of 3.5%, according to the Bureau of Labor Statistics. Additionally, the real unemployment rate, which includes discouraged and part-time workers, rose to 7.1%, marking its highest level since May 2022.
The US economy added 187,000 new jobs in August, marking the third consecutive month that job additions fell below the desired 200,000 mark. There were also significant downward revisions for increases in nonfarm payrolls for June and July. Average hourly earnings grew by 0.2% month over month in August and 4.3% year over year, falling short of analysts' estimates of 0.3% and 4.4% respectively.
These factors indicate a potential decrease in inflationary pressures. Coupled with softening labor market data, it suggests that the Fed has successfully managed a soft landing. Approximately 93% of market participants anticipate that the central bank will maintain interest rates at their current level in its September meeting, while around 62% expect rates to remain unchanged in November, according to the CME FedWatch Tool.
From an investment perspective, this pause in rate hikes positions certain sectors for potential gains. Utility companies like Atmos Energy (NYSE:ATO), which are capital-intensive and often carry high levels of debt, stand to benefit from a lower interest rate environment that can help reduce their debt levels and increase profits.
Similarly, real estate activities could also see benefits as a pause in rate hikes keeps borrowing costs for projects low. This is likely to positively impact stocks such as TopBuild (NYSE:NYSE:BLD), known for supplying various building products to the US construction industry.
Tech companies like NVIDIA (NASDAQ:NASDAQ:NVDA) also stand to gain from a pause in rate hikes as higher interest rates can disrupt their future cash inflows. NVIDIA recently reported strong quarterly earnings due to significant growth in the artificial intelligence field.
Shares of Atmos Energy, TopBuild, and NVIDIA have seen year-to-date gains of 3%, 89.5%, and 231.9%, respectively.
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