Weekly Market Report: October 11th, 2024

Market Anecdotes

• U.S. equity markets maintained their positive momentum, thanks in part to a constructive start to earnings season. Elevated global uncertainty and a notable move higher in bond yields have yet to capture investor attention in the short term.
• With third quarter earnings season now underway, companies in the S&P 500 are expected to grow the bottom line by 4.1% but factoring in historical beat margins, FactSet estimates growth rate will be closer to 9.5%-10%.
• Healthy growth dynamics and last week’s warmer than expected CPI report served to reduce odds of another 50 bps rate cut by the Fed next month.
• With the two-year anniversary of the bull market now in the book, Strategas highlighted the historically average performance of large caps (S&P 500 60.8% vs 60%) and historically below average performance of small caps (Russell 2000 29.9% vs 76.9%) with year 3 to be determined.
• BCA’s geopolitical research pointed out a Harris administration is much more likely to be gridlocked than a Trump administration with markets yet to price in the impacts of sharp immigration curbs, major tax cuts, or global trade wars.
• U.S. government spending increased 10% in FY 2024 while tax revenues increased 11% but the deficit increased by $139b, thanks to interest payments on outstanding debt increasing 34%.
• ETF fund flows show retail investors chasing the surge in China’s equity market with nearly $9b of inflows to China funds, well above the next highest inflow of $1.8b to investment grade credit.
• BCA noted China’s aggressive energy independence push toward nuclear energy poses risks to U.S. dominance in the space where China’s installed capacity just over the past 10 years represents nearly 50% of current installed U.S. capacity.
• A follow-up to last week’s musings about survey response rates and the prevalence of multiple job holders relative to its longer-term trend shows in fact, response rates have fallen and levels of multiple job holders are at their highest point dating back to 1995.

Economic Release Highlights

• The September CPI report came in a bit warmer than consensus forecast with YoY readings of Headline (2.4% vs 2.3%) and Core (3.3% vs 3.2%) and MoM readings of Headline (0.2% vs 0.1%) and Core (0.3% vs 0.2%).
• Headline PPI in September rose YoY (1.8% vs 1.6%) and MoM (0% vs 0.2%) while core readings were up YoY (2.0% vs 2.7%) and MoM (0.2% vs 0.2%).
• Consumer Sentiment declined slightly in October to 68.9 from 70.1 while 1-year ahead inflation expectations increased from 2.7% to 2.9%. 
• The September NFIB Small Business Optimism Index was mostly flat versus the prior month at 91.5.

Weekly Market Report: October 4th, 2024

Market Anecdotes

• The strong PMIs and labor report last week moved Fed Funds rate cut expectations decidedly back toward a 25 bps cut on November 7th, triggered a rally in the USD, moved U.S. Treasury yields sharply higher, and the entire Treasury curve last week on constructive economic reports
• The U.S. and Federal Reserve have plenty of company across developed markets as other central banks are pivoting to rate cuts in response to waning inflation and growth concerns.
• U.S. GDP, which has only seen one quarter since Q2 2022 where the economy posted growth below the 2.0- 2.5% long run potential, is bolstering those in the “no-landing” camp.
• A historical look from Market Desk and Ned Davis at prior rate cut cycles and ensuing returns for the S&P 500 reminds how important it is to get the call on the economy correct and that the bull market, at only two years old, is far from dying of old age.
• Conflict in the Middle East was again on full display last week between Israel and her adversaries leading to a surge in oil prices and increasing uncertainty across the region.
• Improving prospects for China on the back of recent stimulus announcements and implications for a weaker USD have placed more attention on developed international equity markets and Europe in particular with relative valuations providing additional support.
• A tentative agreement was reached between dock workers on the East and Gulf coast ports but there was no discernable market reaction given the short duration of the conflict.
• The $1.5t wall of loan maturities across the U.S. commercial real estate market presents a wide array of challenges and opportunities in what will likely be a slow evolving recovery.
• The U.K’s Office of Budget Responsibility published work on the fiscal impact of migrants at different wage/skill levels showing high and middle income migrants are net positive contributors to the government purse whereas the average U.K. resident and low income migrants are net negatives.

Economic Release Highlights

• The September jobs report was a blockbuster with 254,000 new jobs, well above the spot forecast of 132,000 taking unemployment down from 4.2% to 4.1%.
• Average Hourly Earnings grew above estimates for both MoM (0.4% vs 0.3%) and YoY (4.0% vs 3.7%) and Labor Market Participation stayed at 62.7%.
• The August JOLT Survey showed 8.040M job openings, an increase over the prior month’s 7.63M and well above the spot forecast of 7.7M.
• The September ISM Services Index registered 54.9, well above the prior month and consensus forecast where both were 51.1.
• The September ISM Manufacturing Index registered 47.2, unchanged from the prior month and slightly below consensus forecast of 47.6.
• The JPM Global Manufacturing PMI registered 48.8, down from the prior month read of 49.5. The Composite and Services readings both deteriorated from 52.8 to 52.0 and 53.8 to 52.9.

Weekly Market Report: September 27th, 2024

Market Anecdotes

• China announced a range of measures to support its stock market and economy including lowering mortgage rates, policy rates, and down payment requirements. Additionally, a surprise Politburo meeting addressed fiscal and housing market initiatives and the PBoC expanded allowable collateral for stock market investing. Implications are wide ranging.
• Of note is that oil markets have been on the outside looking in on the rally in global growth sentiment, particularly given this week’s developments in China. Supply side dynamics of OPEC+ and U.S. production are likely culprits to the decline in oil prices to nearly three-year lows.
• The key FOMC policy question with significant implications for equity and bond markets is how fast and how deep does the rate cut cycle develop with data on inflation dynamics and labor market conditions the primary drivers.
• Last week’s bond market reaction to the 50bps FOMC rate cut caught our attention as yields moved slightly higher (inflation risk) as opposed to trending lower (‘behind the curve’ risk).
• Several FOMC speaking engagements last week were focused on defending the 50 bps rate cut due to concern with downside risks to the labor market.
• A potential dockworkers’ strike at 36 U.S. ports receiving over 40% of inbound container volume poses a material short-term risk to supply chains and inflation dynamics.
• Annual BEA data revisions have taken GDP growth notably higher but maybe more importantly, savings rates also notably higher.
• Easier monetary policy and soft landing traction are key contributors to the broader risk on sentiment in markets with soft inflation data and healthy GDP forecasts paving the way.
• The biggest geopolitical concern today is significant escalation in the Middle East including sustained direct or proxy Israel-Iran conflict on which Alpine Macro is placing a 60% likelihood.
• The latest on POTUS election probabilities is best described as trending toward a Harris win but overall, too close to call. Betting markets (52%-47%), FiveThirtyEight polls (48.3%-45.6%), Silver Bulletin (dead heat), and Silver Bulletin (electoral college 53.7%-46.0%) slightly favor Harris.

Economic Release Highlights

• The September release of PCE inflation saw headline (2.2% vs 2.3%) coming in slightly below and core (2.7%) in line. MoM inflation registered 0.1% for both headline and core with the former in line and the latter slightly below estimates.
• Personal income growth of 0.2% and Personal Consumption Expenditures of 0.2% both came in below estimates and registered at the low end of the forecast range.
• September U.S. PMIs (C,M,S) registered 54.4, 47.0, 55.4 where the Composite came in ahead of forecast and relatively in line with prior month while services beat consensus (55.2) and manufacturing missed (48.5).
• Non-U.S. PMIs (C,M,S) in September include Eurozone (48.9, 44.8, 50.5), U.K. (52.9, 51.5, 52.8).
• Durable Goods Orders for August came in above forecast with New Orders (0% vs -2.7%), Ex-Transportation (0.5% vs 0%), and Core Capital Goods (0.2% vs -0.2%) all beating estimates.
• Conference Board Consumer Confidence Index declined to 98.7 in September from 103.3 prior month and well below the spot consensus of 103.0
• The Case-Shiller Home Price Index appreciated 0.3% MoM and 5.9% YoY, in line with forecasts.
• New Home Sales for August of 716k were slightly above the consensus forecast of 700k. Pending Sales grew 0.6%, slightly below consensus estimate of 3.1%

Weekly Market Report: September 20th, 2024

Market Anecdotes

• U.S. equity markets cheered policy developments last week with the S&P marking a new record high as economic soft landing optimism prevailed.
• The Atlanta Fed GDPNow model is currently forecasting 2.9% GDP growth for the third quarter.
• Strategas made note that a key to the soft landing scenario is the need for struggling areas of the economy (manufacturing, housing) to turn up before the softening labor market dries up services spending.
• With the cutting cycle officially underway, markets have more clarity on monetary policy, but we expect questions will persist regarding the overall path of the economy and geopolitics.
• The FOMC ushered in a new era of easing by delivering a notable 50 bps rate cut, leaving markets to handicap exactly where and how fast the target policy rates will go with the median SEP suggesting two more 25bps cuts remaining this year.
• Futures markets were quick to price in a slightly more aggressive pace of easing this year with a 75% probability of getting 75 bps of easing by year end.
• There has been and will continue to be ample debate surrounding what the “neutral” interest rate is for the U.S. economy. Of note is that Powell acknowledged the neutral rate is “probably significantly higher” than what it was pre-pandemic.
• Full cycle easing expectations given the Fed’s estimated neutral rate would see 7 or 8 rate cuts but markets are pricing in closer to 8 or 9 rate cuts over the coming year.
• The PBOC and BoJ conducted policy meetings last week as well with both opting to maintain rates at current levels.

Economic Release Highlights

• Retail Sales grew 0.1% in August, above the spot forecast of -0.3%. Ex-Vehicles (0.1% vs 0.3%) and ExVehicles & Gas (0.2% vs 0.3%) readings both came in slightly below consensus.

• Existing Home Sales in August registered 3.860M, slightly under the spot forecast of 3.90M but within the
  consensus range.

• Housing Starts (1.356M) and Permits (1.475M) both came in slightly above forecasts for August.

• The Housing Market Index registered 41, in line with both the spot consensus (42) and forecast range of 38-
  42.

• Industrial Production in August handily exceeded forecasts (0.8% vs 0.1%) and the consensus range of 0% to
  0.5%.

Weekly Market Report: September 13th, 2024

Markets rebounded nicely from the prior week with a muzzled FOMC, a relatively light economic calendar, an uptick in the soft-landing narrative, and an increased possibility of a 50 bps move by the Fed leading U.S. equity markets to five consecutive up days and the S&P 500 (+4%) back within 1% of its record high. The NASDAQ 100 (+6%) and Russell 2000 (+4.3%) led the way while developed (+2.2%) and emerging (+2.5%) markets lagged. Interest rates fell again across the curve leaving the 10yr UST yielding 3.66% and the 2yr 3.57% with the slope remaining in positive territory. The USD closed relatively flat while commodity markets were up roughly 1.5%, including oil which closed at $68.65.

Market Anecdotes

• Despite warmer inflation data making the case for 25 bps cut, futures markets moved suddenly toward a higher probability (50%) of a 50 bps rate cut last week with Dudley’s comments in Singapore and WSJ and FT articles making the case for 50bps.
• An interesting cross-asset class perspective from JPMorgan showed how bond markets and base metals are pricing in much higher recession probabilities than equity markets and credit spreads.
• The ECB delivered what markets were expecting, which was a second 25 bps deposit rate cut to 3.5% and a 60 bps cut to the refi rate to 3.65% in order to narrow the gap between the two.
• A Bloomberg article reiterated that while unemployment has increased from 3.7% to 4.2%, about half of the move has come from new entrants and reentrants who don’t find work immediately.
• BCA and Alpine Macro strategists continue to see a clear path to a Republican administration with gridlock highly likely due to the economy and/or simple quirks of the Electoral College. Budget deficits, trade protectionism, and governmental influence in the private sector remain the primary market focus.
• Not to be overlooked are the significance of China’s deflationary forces and economic challenges where prices have declined for five consecutive quarters, something we haven’t seen since the late 1990’s back when China represented only 3% of global GDP (> 20% today).
• Bloomberg highlighted the outflows occurring in Bitcoin ETFs, estimating investors are sitting on a record $2.2b in unrealized losses. Investor adoption has been overwhelmingly retail (75%-80%) with professional investors the remainder.

Economic Release Highlights

• August CPI YoY Headline (2.5% vs 2.6%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.2%) were generally in line with consensus estimates.
• August PPI YoY Headline (1.7% vs 1.8%) and Core (2.4%) along with MoM Headline (0.2% vs 0.2%) and Core (0.3% vs 0.3%) were generally in line with consensus estimates.
• NFIB Small Business Optimism Index deteriorated versus the prior month and registered below the consensus estimate (91.2 vs 93.6).
• The UofM Consumer Sentiment Index (69.0 vs 68.0) improved slightly versus prior month and 1-year inflation expectations fell one tick to 2.7%.

Weekly Market Report: September 6th, 2024

While the soft landing narrative still seems in charge, the month of September started out with a pretty rough week. Some single name narratives combined with a dose of concerning economic data resulting in a 4.2% loss in the headline S&P 500 and sharply lower bond yields. Developed and emerging equity markets were both down approximately 3.5% while small caps and the NASDAQ (growth stocks) were both down close to 5%. Ten year and 2yr UST yields fell from 3.91% to 3.72% and 3.66% respectively last week, leaving the 2yr/10yr in positive slope territory for the first time in two years. WTI crude oil fell sharply (-10%) to close at $68.22/barrel.

Market Anecdotes

• Monetary policy narratives focused on a trio of labor market reports last week leaving Fed Funds futures pricing in more of a ‘front-loaded’ path with six cuts now priced in over the next four meetings. Markets still see probabilities at 70% for 25 bps and 30% for 50 bps on September 18.
• UST yields hit fresh 52-week lows this week which can be seen as a ‘tailwind’ for equities due to a lower discount rate, but the ‘tailwind’ can certainly manifest as a ‘headwind’ if the reason for declining yields is heightened risk of economic and earnings slowdown.
• Bespoke noted that, while a lower Fed Funds rate (and very short end of the yield curve) needs to wait for formal FOMC policy announcements, bond markets price in forecasted policy moves in real time, allowing new issuers of corporate bonds and ABS to enjoy lower rates now.
• If recession fears are rising, the high yield bond market certainly doesn’t see it with spreads at 3.29%, well below the long-term average of 5.32%.
• The 2yr/10yr yield curve spread closed in positive territory last week for the first time since July 2022. The 3mo/10yr remains deeply negative at -1.41%, not too far off the cycle low of -1.86%.
• While hard data and soft (survey) data are clearly positively correlated, a chart from MRB acts as a good reminder that soft data tends to ‘overshoot’ on both up and down swings leaving investors best served focusing on hard economic data and corporate earnings trends.
• Commodity markets have been very mixed this year with oil, agricultural commodities, and most industrial metals down on the year countered by a very strong year for gold.
• The U.S. budget deficit has averaged 2.57% of GDP since 1948 with a recessionary 2009 GFC deficit of 9.75% and 2020 pandemic deficit of 14.7%. The 2023 budget deficit was 6.3% with 2024 projected near 7%.

Economic Release Highlights

•  August payrolls came in below the consensus estimate (142,000 vs 160,000) and the unemployment rate declined from 4.3% to 4.2% as forecasted.
• Labor force participation was unchanged at 62.7% and average hourly earnings edged higher and came in above consensus forecast on both MoM (0.4% vs 0.3%) and YoY (3.8% vs 3.7%).
• The JOLT Survey in July reported a significant decline in job openings to 7.673M, well below consensus forecast of 8.1M and the prior month reading of 8.184M.
• ISM Services Index for August registered 51.5, remaining in expansionary territory and coming in slightly above the consensus forecast of 51.1. ISM Manufacturing Index for August registered 47.2, relatively in line with the consensus forecast of 47.5.
• The JPM Global Composite PMI (C,M,S) of (52.8, 49.5, 53.8) showed a slight improvement in composite and services readings offset by slight deterioration in manufacturing.
• The Fed Beige Book on qualitative economic backdrop reported “flat or declining” activity in nine of twelve Fed districts.

Weekly Market Report: August 30th, 2024

Market Anecdotes

• The hiking cycle of 2.5 years and 500 bps is set to end September 17-18 with limited data points between now and then, where markets firmly expect a Fed rate cutting cycle to begin, begging the question, which equity asset classes have historically benefitted the most?
• Second quarter S&P 500 earnings were up nearly 12% YoY with 74% of firms topping estimates, including Nvidia, last week, handily beating forecasted earnings ($0.68 vs $0.65) and revenue ($30b vs $28.9b).
• Alpine Macro published an interesting piece on AI concluding that a valuation premium exists due to market expectations of higher revenue, a boost to EBITDA, enhanced productivity, and higher GDP growth but it is not currently meeting the definition of bubble or mania. 
• Expectations for a soft landing path for the U.S. economy to transpire has increased notably since April as data indications have maintained a positive tone and model projections, including the Atlanta Fed GDPNow model have remained consistently above 2%.
• Along with the positive 2Q GDP revision last week, we received data on corporate profits which grew 1.7% pre-tax with after-tax aggregate profit margins edging higher from 15.2% to 15.4%.
• Housing market data last week reinforced the tepid outlook for the time being with inventory, rates, and prices posing tangible headwinds to prospects of any near-term recovery. 
• A Penn Wharton Budget model estimates that, despite spiraling national debt and massive budget deficits, both team R and team D are forecasted to deliver the status quo. 
• According to Bloomberg’s data set, as recently as 2017 passive mutual funds and ETFs accounted for 35% of assets. That grew to 50.1% in December 2023 and has continued its march higher with the July 2024 tally at 51.3%.

Economic Release Highlights

• August YoY PCE inflation was in line with expectations for both headline (2.5%) and core (2.6%) alongside MoM readings of 0.2% for both headline and core PCE. Personal income grew slightly more than forecast (0.3% vs 0.2%) and PCE was in line with spot consensus at 0.5%.
• 2Q U.S. GDP was revised higher in the second estimate from 2.8% to 3.0% thanks in large part to stronger personal consumption which was revised up from 2.3% to 2.9%.
• Consumer Confidence in August improved to 103.3 from July’s 101.9 reading, ahead of both the spot consensus 100.1 and forecast range of 99.5 to 103.0.,
• Case-Shiller Home Price Index for June rose 0.4%, more than the consensus forecast of 0.2%.
• Pending Home Sales in July fell 5.5%, well more than the forecasted 1.1% increase projected.
• Durable Goods Orders report for July jumped 9.9%, well in excess of the 4.5% spot consensus and above the high end of the forecast range of -0.3% to 9.0%.

Weekly Market Report: August 23rd, 2024

Last week, markets absorbed a relatively light economic calendar, the Jackson Hole Symposium, and a handful of remaining 2Q earnings reports. While the S&P 500 and NASDAQ snapped their 8-day winning streak last week, they still managed to post a nice weekly gain of approximately 1.4%. Small caps (+3.5%) and developed international (+3.1) both posted strong gains while emerging markets gained 1%. Bonds rallied as interest rates fell across the curve. The biggest move was in 2yr yields, down 16 bps to 3.90%. Longer maturities declined as well with the 10yr closing 8 bps lower to yield 3.81%. The USD fell 1.7%, continuing its descent since late June while commodity markets were mixed with energy price declines offset by strength in industrial metals.

Market Anecdotes

• The soft landing narrative has been dominant with the S&P 500 back to pre-July jobs report levels, and the Nikkei back to where it was prior to the Yen carry trade unwind. Cool inflation numbers, strong retail sales, and some light unemployment claims have aided momentum.
• The July FOMC meeting minutes released last week were dovish as expected and contained no material surprises. Several participants mentioned reported payroll gains might be overstated, which was indeed the case with an 818k downward revision announced on Wednesday.
• Powell’s remarks before the Jackson Hole Symposium indicated what markets were expecting, which is that “The time has come for policy to adjust” and that “the timing and pace will depend on incoming data, the evolving outlook, and the balance of risks.”
• Fed funds futures are pricing in a 25 bps cut in September with a 24% chance of 50 bps to begin the cutting cycle. Beyond that, markets see 1.25% of easing through the four meetings ending January and a total of eight cuts over the next 12 meetings.
• A ClearBridge study examined the drivers behind the rise in unemployment from 3.7% to 4.3%, concluding the higher percentage of “new entrants and re-entrants”’ instead of “job losers and leavers” supports the idea that the job market may be stronger than the data suggests.
• Overall financial conditions in the U.S. have become very supportive as measured by the Goldman Sachs FCI. However, the pace of labor market deceleration has the potential to trigger a feedback loop which may cause overall financial conditions to begin to tighten.
• The USD marked a new 2024 low last week, fueled in part by decelerating labor market concerns. USD is down 5% from its 2024 high back in April, 3% of which happened in August.
• As the November elections draw closer, we will begin to analyze fiscal policy (and executive actions?) as it relates to aggregate demand and financial markets as well as the longer-term implications of U.S. government deficit spending.

Economic Release Highlights

• The August Flash U.S. PMI saw the Services Index beat (55.2 vs 54.0) and the Manufacturing Index miss (48.0 vs 49.5) translating to a healthy Composite Index (54.1 vs 53.3).
• The August Flash Eurozone PMI (C,M,S) registered (51.2, 45.6, 53.3) where the manufacturing index missed and services index exceeded expectations. The UK registered (53.4, 52.5, 53.3), beating forecasts for both manufacturing and services readings.
• Existing Home Sales in July of 3.95M came in slightly above spot consensus of 3.90M, increasing 1.3% MoM and down 2.5% YoY. New Home Sales in July of 739K were well above the spot forecast of 628k and the consensus forecast range of 605k-648k.
• The Conference Board LEI Index registered -0.6% in July, extending its lengthy deteriorating trend.

Weekly Market Report: August 16th, 2024

Market Anecdotes

• Equity markets welcomed last week’s busy economic calendar following recent concern surrounding a slowdown in the U.S. economy. The inflation, retail sales, and labor market indicators generally served to soothe markets.
• Economic data and FedSpeak last week translated to reduced market expectations for aggressive rate cuts where probabilities of a 50 bps cut at the upcoming September FOMC meeting fell from 51% to 26% but a 25 bps cut is carrying a 75% probability.
• As the Fed approaches an easing cycle Bespoke noted, despite cuts already from many central banks, the GDP weighted average global policy rate has only fallen 25bps since the 6%+ level.
• The unofficial close of 2Q earnings season with the Walmart report on Thursday leaves the S&P 500 with YoY blended earnings and revenue growth were 10.9% and 5.2%, respectively.
• A recent survey by Affirm showed 59% of respondents falsely believe the U.S. is currently in recession, likely due to the difficulty of inflation pressure on lower income households. The most recent Bloomberg survey shows 30% of economists expect recession within a year.
• A hazardous materials explosion at the world’s third busiest container port, the Ningbo Port in China, leading to its indefinite closure, is expected to impact key trans-Pacific trade lanes, supply chains during peak shipping season.
• An index from Eurekahedge which tracks hedge funds who utilize AI and machine learning theory suggests that portfolio manager jobs appear to be safe, at least for now with the S&P 500 dramatically outperforming, particularly since ChatGPT was launched.

Economic Release Highlights

• July CPI YoY Headline (2.9% vs 3.0%) and Core (3.2% vs 3.2%) along with MoM Headline (0.2% vs 0.2%) and Core (0.2% vs 0.2%) both registered generally in line with consensus estimates.
• July PPI YoY Headline (2.2% vs 2.6%) and Core (2.4% vs 3.0%) along with MoM Headline (0.1% vs 0.2%) and Core (0.0% vs 0.2%) came in below both forecast and prior month readings.
• The July NY Fed Survey of Consumer Expectations reported 3-year inflation expectations fell by 0.6% to 2.3% while median 1yr (3.0%) and 5yr (2.8%) were unchanged.
• July Retail Sales were above the high end of the forecast range and well above the spot forecast for Headline (1.0% vs 0.3%), Ex-Vehicles (0.4% vs 0.1%), and Ex-Vehicles & Gas (0.4% vs 0.3%).
• Weekly Jobless Claims were below the spot forecast and toward the low end of the range (227k vs 234k). The labor market has seen tour week moving average claims fall from 241k to 236.5k.
• The July NFIB Small Business Optimism Index registered 93.7, above both the spot forecast (91.7) and toward the high end of consensus range (91.6-92.0).
• August UofM Consumer Sentiment reading of 67.8 was slightly better than spot consensus 67.0 and within the forecast range (65.0-69.1).
• The Housing Market Index dropped in August to 39, missing the consensus estimate of 42.
• July Housing Starts (1.238M vs 1.342M) and Permits (1.396M vs 1.430M) slowed down from June and came in below estimates.
• July Industrial Production cooled relative to June’s strong 0.6% reading and came in below forecast (-0.6% vs -0.1%).

Weekly Market Report: August 9th, 2024

Global equity and bond markets endured another volatile week despite a notable lack of catalysts. U.S. equity markets spent most of the week clawing back from Monday’s selloff thanks to a reappearance of the soft- landing narrative, an uptick in corporate buyback activity, and bounce momentum leading to lower systematic selling estimates. Last week saw a relatively light economic calendar and a continuation of second quarter earnings reports. U.S. equity markets were down and up during the week but ended flat (-0.04%) while international developed (+0.49%) and emerging (+1.11%) both managed marginal gains. Bond yields continued to reclaim lost ground of the past two weeks in what was a relatively parallel shift higher approximately 12 to 18 bps. The USD was unchanged against a basket of currencies, including the Yen, and commodity markets traded higher thanks in large part to a 4.5% rally in WTI crude oil which closed up 4.5% to $76.84.

Market Anecdotes

• Examining market internals and trending economic data over the past two weeks in an effort to conceptualize the sudden surge in volatility leaves our short term (neutral) and intermediate term (cautious) views largely unchanged.
• Apollo noted the low level of job cuts to reinforce the idea that the Sahm Rule does not apply to the current labor market due to the significant increase in immigration.
• A close look at the behavior of high yield credit spreads made clear there was not a material spike in perceived credit risk to go along with the material spike in equity market volatility.
• Several strategists have highlighted market leadership rotation evident since the soft July 11th CPI report, seemingly a marker for reestablishing the disinflation narrative and an associated dovish monetary policy pivot acknowledging labor market deterioration.
• Now in the later stages of the earnings season (91% of S&P 500 reported), second quarter blended earnings have grown 10.8% with beat rates of 78% and beat margins of 3.5%. Revenue grew by 5.2% with below average beat rates (59%) and beat margins (0.5%).
• Bloomberg’s Taro Kimura noted recent speculative Yen short positioning is as ‘offside’ as we’ve seen since the Yen carry trade implosion we saw back in 2007.
• The 2/10 curve which has been inverted since July 2022 ‘uninverted’ briefly last week which, in the past four recessions, has happened on average two to six months past the beginning of the recession.
• Trepp CMBS Research noted 30-day CMBS delinquencies ticked higher in July to 5.45%, up from 4.41% last year, with over 65% of newly delinquent loans coming from the office sector which is now over 8%, up sharply from 4.96% last year.
• The global geopolitical landscape remains in flux with a potentially large conflict looming in the middle east between Israel and Iran.

Economic Release Highlights

• The July ISM Services Index (51.4 vs 51.0) was generally in line and improved over June’s 48.8.
• The JPM Global Composite PMI registered a composite reading of 52.5 and services of 53.3.
• Weekly jobless claims came in below expectations (233k vs 240k) and the 4-week moving average claims increased to 240k.