Friday, 12 July 2019

Record highs were posted this week, with the S&P 500 topping 3,000 intraday and the Dow Jones breaking through 27,000.

Stocks:

The gains followed dovish comments from Federal Reserve Chairman Powell. The Fed rate futures market continues to expect an interest rate cut at the July 31st FOMC meeting, and possibly two by the end of the year. Stocks were also boosted by news on the trade front that U.S. and Chinese negotiators have been in contact to discuss a face-to-face meeting. The energy sector led for the week, up roughly 1.9%, as the price of WTI crude spiked above $60 per barrel over fear of supply chain disruptions from rising tensions in the Persian Gulf. Pharma and biotech companies lagged over withdrawal of a rule that would have passed on rebates to drug makers from health insurers.

The Nasdaq and S&P 500 retreated from their intraday highs on Thursday following the approval of a digital services sales tax in France that has the potential to impact the bottom lines of tech giants such as Apple, Amazon, and Alphabet. Second quarter earnings season is already underway, with PepsiCo beating earnings estimates on strong North American sales. According to FactSet, second quarter earnings growth estimates for 2Q19 for the S&P 500 come in at -2.6%, which would be the first time the index posted consecutive quarterly earnings declines since 2016.

Bonds:

U.S. government bonds fell this week, steeping the curve. The yield on the benchmark 10-year U.S. Treasury note rose to 2.14% and the yield on the 2-year note rose to 1.86%. The spread between the 10-year and 2-year notes steepened from 0.19% to 0.28%, likely in response to comments from the Fed’s Powell.

Economy:

In addition to the FOMC meeting minutes, Chairman Powell testified before the House Financial Services Committee and gave testimony to the Senate Banking Committee this week. He pointed to global trade tensions and slower global growth as the primary risks to the U.S. economy. Powell also noted that business confidence is particularly low, although slightly rebounding from May due to U.S. trade issues with China and Mexico. On inflation, he stated that pressures “remain muted” and that weakness may no longer be transitory, as previously described. The chairman also spoke of the “many” on the FOMC that would likely support rate cuts. Core CPI for June, which excludes food and energy prices, was higher than anticipated, rising to 2.1% for the year. Jobless claims fell to 209,000, in step with last week’s unexpectedly strong employment report.

 

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