No sooner had the ink dried on the paper saying “what a great first-half year this has been” than did a dose of reality set in, wrecking the recent run of equity markets and pushing UST yields higher. Funny enough, the main culprit Stateside was a slate of jobs data late-week that showed just how resilient the US labour market remains. It sounds more and more like a broken record, but the fact is that the Fed has a lot more work to do to curb strong consumer demand – especially for services – and this makes investors prickly. I’m not exactly sure why this narrative keeps resurfacing because the writing has been on the wall for some time – inflation is persistent and stubbornly high, and it will take higher rates for longer to rein it in. The FOMC minutes from the mid-June meeting said as much, making it crystal-clear that the rate pause in June was a one-off.
US equities tried to claw back some of the weekly losses in the morning session on Friday – up nearly 1% at one point – but faded into the final hours of trading, leaving stocks in negative territory for the week. The bond market was an equally unpleasant place to be this week as yields headed higher across the curve, although different than prior weeks in that the pain was felt more at the long-end of the UST curve rather than at the more policy-sensitive short end. Think of it this way – strong economic growth for longer means credit demand will remain strong for longer, and this has sent yields on longer-dated bonds soaring. Not surprisingly perhaps, the yield inversion narrowed this week, ending a widening trend since mid-March. In a nutshell, the narrative of strong and resilient economic growth coupled with “higher interest rates for longer” trumped inflation concerns.
One would think that stronger economic growth would be positive for equities. However, as we have learned since the pandemic, there are various technical factors that can be more influential on risk assets than economic data. Sentiment plays an important role, and narratives switch constantly. The bottom line for me – as I mentioned last week – is that there is virtually no chance we will repeat the amazing first-half performance of equities in the second-half of this year. The strong first-half gains were both unexpected and largely sentiment-driven, at times seemingly divorced from fundamentals and the economic outlook. I just can’t envisage the second half of the year being as good as the first half. At some point, tighter monetary policy will bite, and I suspect this will be sooner rather than later. At the same time, inflation will chip away at consumer confidence, and eventually consumers will respond by pulling in their horns. Perhaps this will occur after the summer travel season, since services (including travel) are the main driver, but we shall see.
Before I end this diatribe, I should point out that things are very different in Europe where – based on PPI and other economic data this week – disinflation seems to be gaining steam. We can cheer that news, except that the economy in Europe is balancing on a knife’s edge, albeit varying by country. Nonetheless, I believe that the economies of several key European countries are more likely to head south than the US economy. And I shudder to mention old Blighty, which is in a world of its own facing persistently high inflation and sluggish demand, exacerbated by self-inflicted issues that might take the economy many years to be righted. Now that I’ve worked myself into a state of depression, I best move on.
MARKETS THIS WEEK
Markets were as bad this week as they were good the week before, which is what makes investing interesting. There was plenty of pain this week in nearly all global markets, and across equities and bonds. It is indeed an unusual week when Chinese equities are the best performing stocks (albeit “best of the worst”). Perhaps less surprising was the poorly performing and quickly-fading FTSE 100, which served up the poorest performance of the week. Stateside, it was a similar narrative to what we have seen many weeks this year, with more concentrated and cyclically-sensitive DJIA and the value-led Russell 2000 being the worst performers, whilst the NASDAQ was (relatively speaking) the best.
The US Treasury market provided no solace, as total returns YtD drift down, closer to zero as yields head higher. Corporate bond spreads narrowed, likely reflecting the lag effect of spreads as underlying yields drift higher, rather than confidence in credit. As far as other assets, the price of oil seemed to re-discover its mojo this week, up 4.6% WoW, whilst the US Dollar slid sideways.
If you would like to see details by asset class / market type, go to “The Tables” section below.
WHAT HAPPENED THIS WEEK THAT MATTERED?
June jobs report: https://www.bls.gov/news.release/empsit.nr0.htm on Friday, which was solid enough (and more or less as expected) to even compel the Biden Administration to issue a statement from the White House, saying:
“This is Bidenomics in action: Our economy added more than 200,000 jobs last month—for a total of 13.2 million jobs since I took office. That’s more jobs added in two and a half years than any president has ever created in a four-year term. The unemployment rate has now remained below 4 percent for 17 months in a row—the longest stretch since the 1960s. The share of working-age Americans who have jobs is at the highest level in over 20 years. Inflation has come down by more than half. We are seeing stable and steady growth. That’s Bidenomics—growing the economy by creating jobs, lowering costs for hardworking families, and making smart investments in America.”
Go get ‘em, sleepy Joe! This report followed the weekly jobless claims released the day before (July 6th), here: https://www.dol.gov/ui/data.pdf, showing that initial US jobless claims remain subdued.
FOMC minutes (from FOMC meeting June 13-14): https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20230614.pdf
WHAT’S AHEAD THAT MATTERS?
The focus this week will be on US CPI for June, to be released on Weds, July 12th. The “Nowcast” from the Cleveland Fed is projecting the following:
July (headline) CPI, MoM / YoY: 0.34% / 3.61% (vs June of 0.42% / 3.22%)
July core CPI, MoM / YoY: 0.42% / 5.22% (vs June of 0.43% / 5.11%)
Earnings quarter ended O/A June 30, 2023 (2Q for most companies):
Banks kick-off July 14 with JPM and CITI, then BOA, WFS and MS on July 18, and GS on July 19
“Magnificent seven”: AAPL, July 26; MSFT, July 27; GOOG (Alphabet), July 25; AMZN, July 25; TSLA, July 24; META (Facebook), July 27; and NVDA, Aug 23
Central bank meetings:
Federal Reserve (FOMC): July 25-26 (+25bps expected), Sept 19-20 (with updated projections)
ECB: July 27 (+25bps expected), Sept 14
Bank of England: Aug 3 (+25bps expected) and Sept 21
Bank of Japan: July 27-28 (you can’t possibly ask!) and Sept 21-22
THE TABLES
The tables below provide detail across various global and US equity indices, the US Treasury market, corporate bonds and various other asset classes.
Global equities
US equities
US Treasuries
Corporate bonds (credit)
Safe haven and other assets
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