Last week can best be described as business as usual. The S&P 500 set a new record high last week, closing just shy of the 3,000 landmark at 2,995.82 on Wednesday July 3. Despite the soft ADP Employment Report, the US jobs report exceeded expectations by adding 224,000 jobs, far above the 72,000 recorded last month. The unemployment rate ticked up to 3.7% due to an increase in jobseekers entering the workforce pool, an indication of strong labor markets. Reports from ISM/PMI Manufacturing indices reflected what was already known: manufacturing has slowed but is still growing. The Non-Manufacturing ISM index shows that the rest of the economy is growing at a higher rate.
The strong employment report has already scaled back expectations for rate cuts this year. Treasury yields received a small bounce across the curve but remain severely compressed with a difference of only 0.28% between 1-month and 30-year yields. The yield curve still represents a U-shape with inversion for shorter-maturities but a more typical curve (yields increasing as maturities increase) for longer maturities.
Geo-political events have been quiet, giving markets a break for now in exchange for possible surprises later. Both the US and China have been silent on the trade dispute since the temporary truce was announced but negotiations apparently are continuing. In European markets, IMF chair Lagarde is favored to replace ECB (European Central Bank) head Draghi, providing a low chance of future surprises as she is expected to maintain Draghi’s loose and transparent monetary policies. On Brexit, hardliner Boris Johnson is favored to replace Theresa May as UK Prime Minister with a large potential for rattling markets approaching the 10/31 deadline.
This week likely will be dominated by central banking topics. Fed Chair J. Powell has three speeches slated for this week. In addition, CPI and PPI data will be released. Any pickup in inflation likely will cause the Fed to pivot back towards a holding position rather than the expected rate cut position that was setup from the last FOMC meeting and expected by market participants. It has been unclear whether the Fed or the market is leading the other, and we likely won’t know until the July 31 FOMC announcement, at the earliest. After this week, market focus will shift to corporate earnings season.
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