Weekly Market Update, August 6, 2018
Presented by Fred Burgess
General market news
- After jumping as high as 3.01 percent last Wednesday—the same day that the Federal Reserve (Fed) decided not to raise rates—the yield for the 10-year Treasury opened at 2.95 percent this morning. The yield for the 30- and 2-year Treasuries opened at 3.09 percent and 2.64 percent, respectively.
- The yield curve remains very flat, and the spread between short and long rates remains slightly off its lows. It looks as if the Fed will hike rates in September—or at least once more this year—possibly pushing the curve to new cycle lows in terms of spreads.
- As noted above, surprising few observers, the Federal Open Market Committee did not raise interest rates at last Wednesday’s meeting. It did, however, provide “strong” hints of a September hike by repeatedly noting the strength of the U.S. economy.
- The three major U.S. indices were all up last week. They were led by the Nasdaq, which posted a 0.98-percent gain. Despite continued volatility surrounding U.S.-China trade policy, stocks seemed to brush off the continued noise, as strong earnings helped support markets.
- On Tuesday, Bloomberg reported that the U.S. and China were trying to restart their trade talks to avoid a trade war, but the Wall Street Journal later suggested that these talks were in the preliminary stages. As the week went on, volatility ramped up further, as the Trump administration confirmed that it was considering raising the $200 billion tariff on Chinese goods to 25 percent from the previously planned 10 percent.
- In the earnings picture, Apple calmed technology and FAANG stock (i.e., Facebook, Amazon, Netflix, and Google) fears, as strong service revenue growth and pricing helped it beat earnings. On Thursday, the tech giant’s stock passed $1 trillion in market cap—the first company’s valuation ever to do so.
- Last week was a busy one for economic updates. On Tuesday, personal income and personal spending both showed growth of 0.4 percent in June, matching expectations.
- On Wednesday, the Institute for Supply Management Manufacturing index declined slightly. Even so, manufacturers’ confidence is still at an expansionary level.
- Finally, Friday saw the release of July’s employment report. Last month, 157,000 new jobs were added, against expectations for 193,000. Although the headline figure disappointed, June’s report was revised up by 35,000, nearly enough to offset the shortfall.
|MSCI Emerging Markets||–1.67%||1.01%||–5.61%||3.05%|
|Fixed Income Index||Month-to-Date||Year-to-Date||12-Month|
|U.S. Broad Market||0.09%||–1.50%||–0.87%|
Source: Morningstar Direct
What to look forward to
This week’s data is all about prices—and whether inflation is picking up.
On Thursday, the producer price reports are expected to show that the headline index, which includes energy and food, rose 0.3 percent for July, the same as the 0.3-percent increase in June. There may be some downside here, on declining energy prices. The question will be how much that factor is offset by tariff-driven increases in other input prices, especially steel and electronics. The annual change is expected to stay stable at 3.4 percent, indicating that longer-term inflation pressures remain above the Fed’s target range. The core index, which excludes energy and food, is also expected to remain steady at 0.3 percent for July, the same as for June. The annual number should remain solid at 2.8 percent. Although these figures are stable in the aggregate, under the surface, tariffs are reportedly driving a faster rise in inflation. The effect of tariffs, however, is not expected to show up in the aggregate numbers yet.
Also on Thursday, the consumer price reports are expected to show rising inflation at the headline level. The headline index, which includes food and energy, is expected to have risen 0.2 percent in July, up from 0.1 percent in June. The annual figure is also expected to have risen from 2.9 percent in June to 3 percent in July. The core price index, on the other hand, is expected to remain steady, with the monthly figure at 0.2 percent and the annual figure staying put at 2.3 percent. As with the producer price numbers, these figures would indicate that inflation continues to run above the Fed’s target levels, which should continue to drive interest rates up.