July Ends with Solid Global Stock Gain, US Inflation May Rise
Last Week Review
Global equities fell 2.3% last week with similar losses across the major regions. The two-year Treasury yield declined 0.11% to 4.76% while the 10-year yield moved 0.08% higher to 4.03%. July was another solid month with global equities rising 3.7%. Performance was broad with all S&P 500 Index sectors in positive territory. Natural resource stocks rose 7.7%, helped by China’s economic stimulus and stronger-than-expected global economic data. The Treasury curve steepened as economic resilience mostly unwound declines from a softer-than-expected inflation.
Fitch Downgrades U.S. Credit Rating
Fitch downgraded its U.S. sovereign credit rating to AA+ from AAA, citing expected fiscal deterioration over the coming years and an erosion of confidence in governance due to repeated debt limit standoffs. The move coincided with equity market weakness but somewhat muted moves in Treasury yields. Long-end yields did move slightly higher, but this was also likely driven by the Treasury announcing higher-than-expected near-term issuance. Also, after a year-to-date trough in April, upside macroeconomic surprises have supported about a 0.7% move higher for the 10-year yield.
Some U.S. Labor Market Cooling
U.S. companies added 187,000 jobs in July, under expectations of 200,000 and about even with the previous month. Wage grew 4.4% year-over-year, higher than expected but about the same as in June, and the unemployment rate decline slightly from June to 3.5%. While the labor market is showing some signs of cooling, it is not doing so at a concerning pace and the overall numbers remain solid enough to support ongoing consumer spending. At the same time, however, last week’s Federal Reserve Senior Loan Officer Opinion Surveys showed that U.S. banks continued to tighten lending standards with broad-based decreases in demand. As Fed tightening incrementally impacts economic growth drivers, investors are hopeful labor markets will remain on solid footing.
Bank of England Hike Rate
The Bank of England raised its policy rate by 0.25% to 5.25%. It was a step down from the prior 0.50% increases but the rate now sits at a 15-year high. The central bank toned back its guidance to communicate a data-dependent approach moving forward, with wage growth (currently very elevated) likely to determine future inflation (also very high) and the extent of further hikes.
Amazon Earnings Upside Surprise, Apple Disappoints
Amazon shares gained about 6% after reporting earnings well above estimates and strong forward guidance. However, Apple shares declined about 7% on lower sales and disappointing forward guidance. Most mega-cap tech companies have reported earnings, with broadly positive results.
This Week Preview
U.S. Inflation Expected to Rise in July
U.S. inflation in July is expected to accelerate to 3.3% year-over-year from 3.0% in June, based on the U.S. Consumer Price Index report scheduled for release on Thursday. Core inflation, which excludes more volatile energy and food prices, is expected to remain steady at 4.8%. On a month-over-month basis, both inflation and core inflation are expected to increase 0.2%. This would be in-line with the prior month increase and keep core inflation on track to hit the 3% year-over-year by February. We expect investors to be disappointed in any upside surprise with inflation, which could spur the Fed into another rate hike. Futures markets indicate that investors give about a 10% chance of a September hike.
China Battles Deflation, Ukraine War Spurs Commodities Markets
A handful of Chinese economic data is set to be released early this week. Imports and exports are expected to remain weak while prices may enter deflation territory, at a projected decline of 0.5%. The upside is in the potential that dour economic conditions encourage Beijing to continue to ease policy. Elsewhere, we expect investors to track Russia-Ukraine war developments, which continue to impact commodity markets. Last week, wheat prices rose about 3% at one point after Russia attacked a large port.
UPS, Eli Lilly and Walt Disney Scheduled to Report Earnings
United Parcel Service (UPS), Eli Lilly (LLY) and Walt Disney (DIS) are scheduled to report second-quarter earnings this week. Aggregate earnings of companies in the S&P 500 Index are projected to decline just above 5% year-over-year. While weak, the trend is better than expectations heading into the quarter and supports the broader narrative of stronger-than-expected economic activity.
Source: Bloomberg for data, news developments and schedule of economic releases. Data as of August 6, 2023.
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