The trading week, abbreviated by the Fourth of July long weekend, began at a slow pace. However, market players discovered upon their return that the bullish start of the year for stocks had motivated some investors to cash out.
Table of Contents
The Effect of Geopolitical Anxiety and Economic Concerns
The week was characterized by geopolitical uncertainty and concerns about global economic growth. Uninspiring Services PMI results for June from China and the eurozone, U.S.’s intent to curb China’s intrusion into cloud computing, and China’s new directive demanding foreign entities to seek approval for exporting gallium and Germanium all contributed to the tension.
The Surge in Market Rates
As the week progressed, an uptick in market rates dominated the scene, triggering sell-offs in the stock market. The 2-yr Treasury note yield leaped six basis points to 4.94%, reaching over the 5.00% mark on Thursday. Similarly, the 10-yr note yield climbed back over 4.00%, ending the week with a 23 basis points increase at 4.05%.
The Role of Employment Reports
These developments were linked to the better-than-anticipated reports of June’s ADP Employment Change and ISM Non-Manufacturing Index. The surge in Treasury yields slightly retreated following the release of June’s Employment Situation Report, which indicated less robust payroll growth than the ADP report had suggested. However, the employment report revealed a longer average workweek and a 0.4% increase in average hourly earnings, indicating a promising future for continued spending growth and economic expansion.
Market Concerns Over Rising Rates
The uptick in rates ignited valuation fears in the stock market, as traders speculated about the Fed potentially taking a more assertive stance on its tightening measures. The expectations of a 25 basis point rate hike in July solidified, with predictions of future rate increases also gaining traction. Despite this, the fed funds futures market still favors a “one-and-done” approach, as the odds of a second rate hike at the upcoming FOMC meetings are relatively low.
The FOMC Minutes and CPI Report
The FOMC Minutes for the June 13-14 meeting were released, though they didn’t cause significant market ripples. Market players are likely to pay closer attention to the upcoming June Consumer Price Index report, which might give the low rate hike odds a much-needed boost.
Interest Rates and Their Impact on Stocks
The rising interest rates are attracting more scrutiny from market players as higher risk-free rates introduce more competition for stocks and make further multiple expansion attempts challenging.
Sector Performance and Noteworthy Company News
Among the 11 S&P 500 sectors, only the real estate sector (+0.2%) registered a gain this week. The utilities, communication services, and consumer discretionary sectors experienced the smallest declines, while the health care, materials, and information technology sectors faced the steepest drops.
In company news, Meta launched a new text-based application, “Threads,” which attracted over 70 million users on its first day. Tesla exceeded expectations for Q2 volumes, while Apple is expected to significantly cut its Vision Pro forecasts. The FDA approved a new Alzheimer’s drug, Leqembi, and ChatGPT downloads saw a significant month-over-month decline on iPhones.
Despite the mixed news and economic uncertainties, market players are watching closely and making calculated moves, hoping for a favorable turn in the market trend.
- Wednesday: CPI (MoM) (June)
- Thursday: PPI (MoM) (June)
CPI Data & Federal Reserve: Watchful Eyes on Inflation
Investors, this week, are gearing up for the unveiling of June’s Consumer Price Index (CPI) data. The projection is that June’s inflation figures will display a less steep climb, a potential respite for the market. Wall Street is forecasting a 3.1% year-on-year increase in headline inflation, a softer rise compared to the 4% jump recorded in May – reflecting the gentlest growth rate since March 2021. The core CPI excludes the fluctuating food and fuel costs and is projected to ascend at a 5% annual pace, a dip from May’s 5.3% but significantly overshooting the Federal Reserve’s 2% goal. These figures will considerably shape the market’s anticipations concerning the Federal Reserve’s upcoming strategy.
Throughout the week, the market may be granted a peek into the Federal Reserve’s thought process, with several of its officials, including Neel Kashkari, Loretta Mester, Mary Daly, and Christopher Waller, scheduled to speak. Moreover, the Federal Reserve’s Beige Book is also slated for release, offering a comprehensive perspective on the economic landscape across diverse regions.
Q2 Earnings: Banking Sector in Focus
The commencement of the second-quarter earnings season is on the horizon this week. Significant banking institutions like JPMorgan Chase (JPM), Citigroup (C), and Wells Fargo (WFC) are due to disclose their performance results on Friday.
The focus is on how these banking giants are managing the fallout from the recent wave of bank collapses and the consequent evaporation of deposits across the financial landscape since March. Analysts predict the recent slowdown in dealmaking and trading revenue could put a dent in their second-quarter earnings.
Comments from banking executives, especially those from JPMorgan Chase CEO Jamie Dimon, will draw considerable attention. Their insights into the health of the U.S. economy and the banking sector will be particularly illuminating for investors and market watchers alike.
Last week, the U.S. bond market experienced significant turbulence, primarily driven by stronger-than-anticipated U.S. job creation data. This led to increased expectations for further interest rate hikes by the Federal Reserve, as concerns about inflation remained above target despite signs of economic rebound.
In response to the robust job creation data, a selloff occurred in the bond market, leading to a global surge in government bond yields. US Treasury yields reached 16-year highs, and the 10-year Treasury yield surpassed 4%, worrying investors about increased borrowing costs for consumers and companies.
Even though job creation slowed down, robust wage growth contributed to the rise of 10- and 30-year Treasury yields, pushing them to their highest levels of the year. A brief rally in the Treasury market occurred after payroll growth fell short of economist estimates for the first time in over a year, indicating that US 10-year yields may have peaked.
The selloff was not limited to short-term bonds but also affected the entire yield curve, including the 30-year bonds. This reaction in the bond market reflects the prevalent uncertainty in the markets amid stronger-than-expected U.S. private payroll data and the expectations of aggressive Fed rate hikes.
In summary, the U.S. bond market last week was largely driven by stronger job creation data, leading to heightened expectations of further interest rate hikes and resulting in a significant selloff across the yield curve. The 10- and 30-year Treasury yields reached their highest levels of the year, causing concern among investors about potential increased borrowing costs. Despite a brief rally, the market remains uncertain, awaiting the impact of potential interest rate hikes and the effects of inflation.
Oil & Energy
This week witnessed a minor recovery in oil prices, a shift primarily driven by the uncertainty surrounding the global economic outlook with potential increased and extended rate hikes from the Federal Reserve. However, signs of an emerging balance in the market are evident due to diminished supplies from Saudi Arabia—planning to extend its voluntary production cuts into August—and Russia, which announced plans to slash exports by 500,000 barrels per day to stimulate domestic demand. As a result, North Sea Brent now hovers around $76.8 per barrel, while its U.S. equivalent, WTI, stands at $72.1.
The week concluded with a varied performance among industrial metals. Copper, zinc, and aluminum saw little change, while there were notable increases in nickel and zinc values. Contrastingly, the lead’s price dipped to roughly $2060. This week’s major statistic of note originated not from China but from Chile, affirming a year-on-year decline of about 1% in its copper production. Gold’s performance remains unremarkable, as its price continues to fluctuate within a narrow margin between $1900 and $1930.
The cryptocurrency market last week saw slight changes. Bitcoin (BTC) increased by 0.13%, reaching a price of $30,256.51, and Ethereum (ETH) rose by 4.99% to hit $1,866.56. Other cryptocurrencies like Tether (USDT), Binance Coin (BNB), and USD Coin (USDC) had marginal fluctuations. Bitcoin continues to dominate the market with a market cap of $587.92B, and Ethereum follows with $222.11B. Significant financial developments led to new 12-month highs for major cryptocurrencies last month. However, investors should be cautious due to potential high fluctuations in value.
