The recent equity rally continued last week as the S&P 500 touched a year-to-date high before sliding slightly to end the week. Q2 earnings, so far, have mostly validated the move as more than 75% of the 87 companies in the S&P 500 that have reported beat analyst expectations. The stock market rebound has broadened out beyond just mega-cap tech over the past month as economists shift their timing of a potential recession further and further out.
Jobless claims came in lower than expected last week, defying most market participant’s idea of how the Federal Reserve’s (Fed’s) aggressive hiking campaign would affect the labor market. Despite the Fed’s pause last month, inflation came in cooler than expected in June, resulting in the real, or inflation-adjusted, Fed funds rate sitting at its highest level since 2009. The Fed will meet this week and will likely raise their benchmark rate again − especially now that financial conditions have eased more after both the equity and credit markets rallied over the past month.
The bond market is still coming to terms with a delayed recession. The inversion between the 2-year and 10-year U.S. Treasury yields deepened over the past week, but that came at the expense of the 2-year rising again. Treasury traders are trying to figure out if they should take the Fed at their word or not, and therefore are repricing short yields higher.
A look back
- Global equity markets were mixed last week, with the S&P 500 up almost 1%, while international developed markets fell by 0.5% and emerging markets dropped over 1%.
- U.S. Treasury yields mostly rose last week, albeit at a slower pace than over the past quarter. The 2-year yield rose the most but only jumped by less than 0.1%.
- Retail sales missed estimates on a headline basis, but after taking out autos and gas, core spending came in mostly in line
A look ahead
- The first look at second quarter GDP will be released this week with the main focus on whether personal consumption continued to hold up the economy.
- The Fed and ECB meet this week, and both are likely to raise their benchmark interest rates after sticky inflation data last month.
- Economic releases: Consumer Confidence, New Home Sales, U.S. 2Q GDP, Personal Income & Spending, Personal Consumption Expenditures, U. of Michigan Sentiment.
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