GENERAL MARKET NEWS
After the Federal Reserve (Fed)’s second consecutive 75 basis point (bp) rate hike on July 27, all eyes now look toward the September Federal Open Market Committee (FOMC) meeting. With inflation remaining near 40-year highs, the markets and Fed officials are expecting continued rate hikes through year-end. St. Louis Fed President James Bullard expressed his expectations for another 1.5 percent of rate increases for the year. “I think we’ll probably have to be higher for longer in order to get the evidence we need to see that inflation is actually turning around on all dimensions and in a convincing way coming lower, not just a tick lower here and there,” Bullard explained. Last Friday’s job report supports ongoing hikes. The U.S. saw a robust rise in nonfarm payroll of 528,000 jobs in July— compared to 250,000 jobs expected—and the unemployment rate edged down to 3.5 percent. The U.S. Treasury yield curve was up across most maturities last week. The 2-year, 5-year, and 10-year rose 17 bps (to 3.06 percent), 12 bps (to 2.8 percent), and 5 bps (to 2.7 percent), respectively, while the 30-year fell 3 bps (to 2.98 percent).
Equity markets were mixed last week as the Nasdaq Composite Index and technology stocks continued their rally from the July FOMC meeting and better-than-feared earnings. Economic data came roughly in line with expectations, with the exception of Friday’s jobs report. The surprise to the upside had a heavy impact on short-term rates within the fixed income market, but the equity market held up fairly well. Technology, consumer discretionary, and communication services were the best performers last week as sectors that were among the most beat up from Fed tightening believe we may be closer to the end of the cycle than the start. Energy, REITs, and materials were the worst-performing sectors last week, with investors questioning demand destruction via the Fed’s tighter rate policy.
On Friday, the July employment report was released. The report showed that more jobs were added during the month than expected, with 528,000 jobs created against 250,000 anticipated. This result was the best month for hiring since February and signals continued high levels of labor demand. The underlying data also showed signs of improvement. The unemployment rate fell from 3.6 percent to 3.5 percent against calls for no change, which brought the unemployment rate to the lowest level since the start of the pandemic and matches the 50-year low we saw in February 2020. The strong job market is expected to support the Fed’s plans for tightening monetary policy throughout the year to combat inflation.
WHAT TO LOOK FORWARD TO
Wednesday will see the release of the July Consumer Price Index report. Consumer prices are expected to increase 0.2 percent during the month and 8.7 percent on a year-over-year basis. If estimates hold, this would represent a notable cooling of inflation in July following 1.3 percent monthly and 9.1 percent year- over-year increases in June. One factor in the anticipated slowdown of headline consumer prices during the month is lower gas prices, as we’ve seen the average cost of gas fall notably after peaking in mid-June. Core consumer inflation, which strips out the impact of volatile energy and food prices, is expected to increase 0.5 percent during the month and 6.1 percent on a year-over-year basis.
On Thursday, the July Producer Price Index will be released. Producer prices are expected to increase 0.3 percent during the month and 10.3 percent on a year over year basis, down from the 1.1 percent monthly and 11.3 percent year over year increases that we saw in June. As was the case with consumer inflation expectations, falling energy prices are expected to contribute to the slowdown in headline producer inflation. Core producer inflation, which strips out volatile food and energy prices, is expected to increase 0.4 percent during the month and 5.9 percent on a year-over-year basis. While both consumer and producer inflation are set to slow in July, the Fed is expected to continue tightening policy until we see sustained evidence that inflation is returning closer to its 2 percent target.
|MSCI Emerging Markets
|Fixed Income Index
|U.S. Broad Market
Disclosures: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed- rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed- rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.
Authored by the Investment Research team at Commonwealth Financial Network.
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