Unloved rally in US equities

US equity markets enjoyed another day of rally on Wednesday although FOMC minutes indicated divergence in views within the central bank members. The S&P 500 climbed 0.82% while the Dow Jones Industrial Average added 240 points. The positive mood was supported by earning results from retailers after Target and Lowe's sales numbers provided clear evidence that US consumers continue to spend. For the US, consumer spending is one of the critical indicators of the economy's health given that it represents two-thirds of its GDP. As long as consumers keep their wallets opened, less attention will be given to other indicators such as the recent inversion in the US yield curve.

However, this week's rally in US equities may not be the most loved one. During the August selloff which pulled the S&P 500 6.4% lower, trading volume was well above the 50 and 20 days moving average. Over the past six trading days volumes have been slowing down significantly, an indication of a weak rally.

The minutes from the Fed's latest meeting didn't provide the required support to equity investors. Several members were in favor of keeping rates unchanged as the real economy continued to be in a good place. This will make Powell's job more challenging in September where investors are putting a 100% chance of at least 0.25% rate cut. Given the Fed minutes didn't provide many clues on the possibility of aggressive easing in monetary policy, investors will be all ears to Mr Powell when he delivers a key speech at Jackson Hole on Friday.

Focus today will turn to economic data with PMIs across Europe and the US due for release. It will be very important to see whether the drop in Manufacturing activity in recent months will become a trend. These leading economic indicators provide a true representation of the business cycle. If manufacturing activity continues to deteriorate further in Europe particularly in Germany, the risk of recession becomes more likely. PMIs from the US will also be of great importance as the latest manufacturing figures were slightly above 50 which separates an expansion in activity from contraction.