American stocks have made a swift recovery just days after a global market downturn. The financial markets were initially shaken when the Bank of Japan increased interest rates for the second time this year in late July, disrupting the yen carry trade, where investors borrow cheap yen to invest in higher-yielding assets. This disruption peaked last week, resulting in Japanese stocks experiencing their most significant loss in decades. Concurrently, a disappointing July jobs report in the US stirred recession fears, causing US stocks and bond yields to plummet.

However, this week, a series of positive economic indicators have helped the market recoup some of its losses. The Dow has rebounded above 40,000, and all three major US stock indexes had their best week of the year, with the Dow rising 2.9%, the Nasdaq Composite climbing 5.3%, and the S&P 500 increasing 3.9%. The S&P 500 and Nasdaq have now fully recovered from last week's losses and have posted gains for the month.

The Cboe Volatility Index (VIX), Wall Street's fear gauge, has also dropped to 15 from last Monday's peak of over 65, when it recorded its largest single-day point increase since March 2020. Analysts from Ned Davis Research have noted that the bull market remains intact, with traders seemingly moving past the initial shock of the yen carry trade's unwinding.

Despite the current calm, investors remain cautious, closely monitoring economic data ahead of the Federal Reserve's September meeting. The Fed is expected to consider the July Personal Consumption Expenditures price index, labor market data, and other inflation metrics for August before making its next policy announcement on September 18. While some traders anticipate an interest rate cut in September, there are signs that central bank officials are adopting a wait-and-see approach.

Atlanta Fed President Raphael Bostic has indicated a desire for further progress in reducing inflation before committing to a rate cut, emphasizing the need to confirm the trend's authenticity. This week's data suggests that inflation may indeed be easing, with the annual consumer price increase falling to 2.9% in July, the first time it's been below 3% since March 2021. The US wholesale price increases have also shown a slowdown.

Additionally, a better-than-expected retail sales report for July indicates the resilience of US consumer spending, a key pillar of the economy. While this data supports the possibility of a September rate cut, the magnitude of the cut—whether a quarter or half-point—remains uncertain. Traders have adjusted their expectations for a half-point cut in September to 26% from 51% the previous week, as per the CME FedWatch Tool.

The Russell 2000 index, which tracks US small-cap stocks, has risen 3% this week, reflecting traders' bets on a Fed rate cut in September. Typically, small-cap stocks perform well following the initial rate cut in a Fed easing cycle. However, before the Fed's meeting, Fed Chair Jerome Powell will speak at an economic summit in Jackson Hole, Wyoming, an event he has previously used to signal upcoming policy changes, which can cause significant market volatility.

In other news, US crude oil prices declined this week after OPEC reduced its global oil demand growth forecast for 2024 and 2025, citing weaker expectations in China. On the corporate front, Starbucks' shares surged 26.3% this week with the announcement of CEO Laxman Narasimhan's immediate departure and the upcoming appointment of Chipotle's Brian Niccol. Walmart's shares also rose 8.1% this week following a report of increased sales and operating income for the last quarter. It's worth noting that stock levels may experience slight fluctuations after the market's close.