Market Pulse

In focus

Financial markets have been playing a game of tug-of-war between inflation and economic growth fears over the past several months. Last week, the June employment report showed that the economy is not in a recession with 372,000 jobs added. The stock market, which just had one of the worst first halves to a year, pared some of those losses on reduced recession fears.

However, the bond market took the strength in the economy as a green light for the Federal Reserve (Fed) to continue to fight the battle against inflation. The jobs report likely gives the Fed a pathway to hike another 0.75% at their next meeting in two weeks. As a result, the U.S. Treasury yield curve flattened as traders priced in the anticipated aggressive hikes, which pushed up short-term yields. This, in turn, pushed up longer dated yields, but not as fast, because of fears that eventually the Fed could hurt the economy by tightening financial conditions too much. This caused the 2/10-year U.S. Treasury curve to invert again.

Both the Fed’s forward guidance and the yield curve will be important factors in the earnings releases this week. Several large U.S. banks will begin releasing their second quarter earnings to kick-start this earnings season. A flat yield curve and rising interest rates impact how much money banks can make on their loans versus how much they pay to customers on their deposits. Banks also sometimes give warning signs if they fear a recession may be coming by showing how much reserves for losses they start keeping on their books. As we move through earnings season, investors will be closely monitoring company commentaries on guidance, earnings, and the economic environment.

A look back

• Global equities finished the week higher, with the MSCI ACWI returning 1.6%, led by U.S. stocks’ gain of 2.0%. International developed and emerging markets equities lagged but still gained nearly 1%.
• Investors sold bonds again last week as yields rose across the curve by around 0.20%. Short-dated yields rose faster than long-dated yields, inverting the 2/10-year U.S. Treasury yield curve again.
• The June jobs report showed a healthier economy than most had anticipated with 372,000 jobs added while the unemployment rate stayed at 3.6%.

A look ahead

• The Fed will release its beige book which will give a clue as to how it thinks the economy is shaping up ahead of the Federal Open Market Committee meeting later this month.
• Q2 earnings will start this week with the releases from some large U.S. banks. The impact of inflation and consumer sentiment on earnings will give a clue about the economy.
• Economic Releases: MBA Mortgage Applications, Consumer & Producer Prices, Retail Sales, Industrial Production, Univ. of Michigan Sentiment.