The S&P 500 and the Dow Jones Industrial Average reached new record highs and crossed the respective symbolic thresholds of 3,000 and 27,000 for the first time last week. The tech-heavy Nasdaq also performed well and ended last week as the best year-to-date performer, up nearly 24 percent, while the smaller-cap indexes recorded modest losses.
Expectations for a Federal Reserve rate cut seemed to dominate traders’ attention last week. The previous Friday’s strong June jobs report weighed on sentiment as the week’s trading opened. While most analysts still expected a rate cut at the Fed’s July 30–31 meeting, a 50bp rate cut seemed increasingly unlikely given the strong payrolls data. By the end of the week, federal funds futures were pricing in only a 21% chance of a half-point cut.
Stock futures shot higher Wednesday morning, however, following the release of testimony that Fed Chairman Jerome Powell would provide to Congress. Traders seemed especially pleased that Mr. Powell stated that “uncertainties around trade tensions and concerns about the strength of the global economy continue to weigh on the U.S. economic outlook.” That less-than-great news was taken as a sign that rate cuts were coming.
Last week’s economic data provided little evidence that the Fed needed to come to the expansion’s rescue and may have even highlighted the peril of cutting rates in an economy with full employment. On Thursday, the Labor Department reported that the core (ex-food and energy) inflation rate rose 0.3 percent in June versus consensus expectations for a 0.2 percent gain. Data on June producer price inflation and consumer inflation expectations also increased more than expected. Meanwhile, weekly jobless claims fell back to near five-decade lows. A dark spot in the week’s data was a decline in a measure of small business optimism, which put an end to a five-month stretch of gains.
The solid economic signals sent prices lower on the benchmark 10-year U.S. Treasury note and its yield to its highest level in a month. In a potentially concerning sign for bond investors, the week’s Treasury auctions continued to be met with tepid demand. The so-called bid-to-cover ratio on Tuesday’s auction of the three-year note came in at its lowest level in a decade, according to Bloomberg, a fate previously suffered by the 10-year note in May. This pattern may be particularly concerning given the widening federal deficit and the increased borrowing needs that brings. During his congressional testimony, Chairman Powell urged lawmakers to raise the federal debt limit before the Treasury Department exceeds its borrowing limit in early September.
Stock markets in Europe fell despite fresh signs that the Fed and the ECB are considering further stimulus measures. The pan-European STOXX Europe 600, the UK’s FTSE 100, the exporter-heavy German DAX, and France’s CAC 40 all fell as trade tensions erupted between the U.S. and France and amid more signs of economic weakness across the region.
Stocks in China recorded a weekly loss, as traders digested trade data underscoring the U.S. trade rift’s negative impact on China’s economy. On Friday, China reported that export growth in June slowed 1.3 percent from a year ago, while imports fell a bigger-than-expected 7.3 percent from the prior-year period. Meanwhile, June imports from the U.S. sank 31.4 percent from a year ago, while U.S.-bound exports fell 7.8 percent. Japanese equities edged lower last week and gave back some of the strong gains accrued in the prior week.
From the headlines…
The S&P 500 reached 3,000 for the first time last week. Since the S&P hit 2000 in August 2014, its top performers have been Abiomed (added 892%), Nvidia (rallied 723%), Advanced Micro Devices (risen 706%), Amazon.com (climbed 490%), MarketAxess (up 487%) and Netflix (advanced 456%). The worst performers in that span can be found here.
Last week, Fed Chairman Powell told Congress that the Fed has room to cut rates, saying the relationship between inflation and jobs has “become weaker and weaker.” While the U.S. economy is in a “very good place,” the central bank chairman said the Fed “wants to use our tools to keep it there” and to offset global weaknesses linked to trade tensions. The economic outlook hasn’t improved in recent weeks, an indication the central bank could be prepared to cut its benchmark short-term interest rate when officials meet later this month. Minutes of the Federal Reserve’s June meeting were also released.
The number of available jobs exceeded the number of unemployed Americans by 1.4 million in May.
According to Grant’s Interest Rate Observer, globally speaking, interest rates are at a 4,000 year low.
There is reason to be concerned about the upcoming earnings season.
President Trump has nominated Judy Shelton, a “gold bug,” a long-time critic of low interest rates, and one of his longtime economic advisers for one of the open Fed seats. Not coincidentally, Dr. Shelton has recently changed her mind and become a vocal proponent of slashing interest rates to zero. The president also tapped Christopher Waller, research director at the Federal Reserve Bank of St. Louis (and a more conventional Fed pick).
Republicans used to say they were concerned about debt and deficits. Apparently no more. President Trump’s top economic adviser Larry Kudlow downplayed the U.S. record national debt of $22.5 trillion on Tuesday, claiming that it’s not a cause of concern and that the federal government is prepared to manage it.
In a large poll, 23 percent of Americans said they never plan to retire, many because they feel financially unprepared. Government figures show about one in five people 65 and older was working or actively looking for a job in June. That data suggests a disconnect between retirement plans and the realities of aging. Remaining in the workforce may be unrealistic for people dealing with unexpected illness or injuries.
Morgan Stanley is turning bearish on global equities.
In the first six months of the year, U.S. funds that consider environmental, social and governance factors when making new bets attracted a net $8.4 billion, according to Morningstar.
As the Iranian economy craters, Tehran and its proxies are lashing out in increasingly aggressive ways. In just the past month, Iran shot down a U.S. drone, which the U.S. says was flying over international waters, the Iran-backed Houthis took credit for a cruise missile strike on Saudi Arabia’s Abha airport, Iran’s military is believed to be behind mine attacks on commercial ships near the Strait of Hormuz, and now, per The Wall Street Journal, “Iran said it was taking steps to increase uranium enrichment that would break limits set in a 2015 nuclear deal by Monday morning, violating for the second time elements of the multiparty accord and putting it at risk of collapse.” Indeed, Iran has followed through on its threat to enrich uranium beyond the purity limit set under the 2015 nuclear deal, the UN’s nuclear watchdog has confirmed. Iran warns it will take further steps to breach the 2015 nuclear accord in early September if it doesn’t receive relief from U.S. economic sanctions.
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