In focus
Equity markets began the third quarter in the red as investors questioned the path of the Federal Reserve’s rate hike campaign (Fed). Stocks were hit as incoming labor market data was not weak enough to rule out another Fed rate hike at the July meeting.
Bond markets also took a hit as yields soared. Following Thursday’s robust ADP jobs data, the 10-year U.S. Treasury yield closed above 4% for the first time in over four months. After the minutes from the Fed’s June policy meeting were released on Wednesday, investors adjusted their expectations around monetary policy. Perceiving the minutes as hawkish, futures markets are now pricing in the highest terminal rate since before the regional banking crisis at roughly 5.4%.
Looking ahead, companies will start reporting second quarter results this week. Investors will be paying attention to the financials sector as a few major banks are set to report late in the week. Inflation data will be another potential catalyst with the release of the Consumer Price Index (CPI) and Producer Price Index (PPI). Central bankers will likely pay special attention to core prices, which exclude the volatile food and energy components; core inflation has proven more stubborn than headline prices in recent months.
A look back
- Equities dropped across the board last week with both U.S. and international stocks down over 1%. Emerging markets outperformed, down about -0.6%.
- Following strong employment data, U.S. Treasury yields rose across the curve while the 2-/10-year curve inversion eased.
- Amid a flurry of labor data, the ADP Employment Survey blew out expectations on Thursday. The Friday payrolls report was below consensus, but still relatively strong.
A look ahead
- Investors will scrutinize key inflation reports with the release of both CPI and PPI. Along with last week’s labor data, these will be major inputs into the Fed’s policy rate decision later this month.
- Second quarter earnings season kicks off with about a dozen S&P 500 firms reporting Q2 results. Financials will be in focus with a few major banks reporting late in the week.
- Economic releases: CPI, Hourly Earnings, PPI, U. of Michigan Sentiment
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