Friday, July 28, 2023
U.S. and International Equities
The major market indexes ended higher this week as emerging market equities led both the U.S. and developed international markets. China’s efforts to stimulate its economy along with the nation’s housing ministry reinforcing calls for property support helped propel emerging market equities this week.
The Dow Jones Industrials gained ground for 13 consecutive trading sessions before its winning streak ended on July 27. Positive earnings from the likes of Meta (META), Abbvie (ABBV), Lam Research (LRCX), McDonalds (MCD), and others have caused some investors to rethink their macroeconomic outlooks. In addition, the S&P 500 Index beat rate has increased several points higher in recent days and is now above its five-year average.
The American Association of Individual Investors reported bullish investors were at 44.9% for the week-ending July 26, down from 51.4% the prior week. Investors with a neutral view increased almost 4% to 31% while bearish investors increased over 2%.
Fixed Income Returns Mixed
The Bloomberg Aggregate Bond Index ended the week lower as the Federal Reserve increased interest rates, as expected. June’s better-than-expected inflation and personal spending reports have traders believing the Federal Reserve (Fed) is near the end of its campaign of raising interest rates, however the Fed continues to reiterate that it remains data dependent.
Investors are moving back into municipal bond funds, reversing a trend of outflows that have capped returns for much of 2023. Inflows into muni funds totaled about $1 billion in the week ended last Wednesday, which represents the largest inflows since January. The gain follows two strong weeks of performance for state and local government debt, which has jumped about 1% since July 10—bringing returns to 3.4% this year (Bloomberg Municipal Bond Index).
Energy prices ended the week mixed as the major metals (gold, silver, and copper) also posted varied results. Supply cuts from OPEC and production disruptions continue to curb oil supplies, causing oil prices to increase. The intensifying conflict between Russia and Ukraine is also putting some upward pressure on commodity prices. Moreover, China’s stimulus measures have some investors believing that commodity prices could continue higher.
Economic Weekly Roundup
The Fed announced this week that it raised interest rates by 0.25% to 5.5%. This represents the highest level for the federal funds rate in 22 years. Even though consumer prices have declined for 12 months, consumer prices are still up 3% for the year, which is higher than the Fed wants as it is continues to target 2% inflation.
The Federal Open Market Committee has no predetermined expectations about rates for its next meeting in mid-September. We will get two more inflation reports and two more labor market reports before the next meeting, providing some flexibility for the Fed to remain uncommitted about future rate hikes.
June Personal Income and Spending
June’s inflation-adjusted spending grew 0.4%, recovering from weaker real spending in May while headline annual inflation declined to roughly 3%. The Fed’s preferred annual inflation metric decelerated to 2.96% year-over-year in June from 3.82% the previous month as overall inflation pressures eased. Positive real disposable income growth is supporting spending habits for the near-term.
Goods prices in June are outright lower than they were a year ago, for both durable and nondurable goods. In addition, services prices are driving the inflationary dynamics right now as the services spending splurge continues.
South Korea Second Quarter Growth
South Korea’s economy experienced a seasonally adjusted 0.6% growth in the second quarter and increased 0.9% year over year. The growth came despite a decrease in private consumption, construction investments, and lowered government spending during the same period. Imports and exports also declined as overall economic activity slumped and global demand continued to weaken.
German Business Climate
The German Ifo business climate survey deteriorated for the third consecutive month in July as tight labor market conditions, inflation and the European Central Bank’s (ECB) hawkish mandate to stymie price pressures are negatively affecting the country’s business outlook. The ECB’s lending survey showed a record drop in loan demand and reached an all-time low.
Eurozone Manufacturing and Services PMI
According to the S&P Global Flash Eurozone purchasing managers’ index, Eurozone economic activity shrank at its fastest rate in eight months this month, as a contraction gathered pace given cuts in manufacturing. Presently, the reading is below the index’s measure of growth. Moreover, the S&P Global services PMI fell to its lowest since January, missing economists’ forecasts. Consumers are feeling the effects from rising borrowing costs and prices as spending declined.
Weekly Employment Report
Initial claims for the latest week came in below economists’ consensus expectation as well as the prior week’s print. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, were also below both the prior week’s levels and economists’ expectations. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead, in addition to another 170 S&P 500 companies reporting second quarter earnings:
- Tuesday: S&P Global PMI Manufacturing (Jul), construction spending (Jun), ISM Manufacturing (Jul), JOLTS Job Openings (Jun)
- Wednesday: ADP Employment Survey (Jul)
- Thursday: Weekly initial and continuing unemployment claims, BEA Total Light Vehicles Sales (Jul), unit labor costs (Q2), productivity (Q2), PMI Composite (Jul), S&P Global PMI Services (Jul), durable and factory orders (Jun), ISM Services PMI (Jul)
- Friday: Hourly earnings (Jul), average workweek (Jul), manufacturing and nonfarm payrolls (Jul), July unemployment report
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