Markets Blog
David Matzko, LPL Research
The S&P 500 and Nasdaq Composite celebrated America's 248th birthday with multiple record highs as technology and consumer-discretionary names propelled indexes higher. Despite the Independence Day holiday providing a short week of trading in the U.S., markets had plenty of macro releases to digest. Elections dominated international headlines, as voters submitted their ballots in France and in the U.K. this week. The Treasury market experienced its own fireworks as yields ended the week lower, also reacting to June's first wave of economic data. West Texas Intermediate (WTI) crude notched its fourth straight weekly advance.
Index Performance
U.S. and International Equities
Markets: In a holiday-shortened week to start the second half of 2024, U.S. indexes delivered new records and weekly gains. The S&P 500 printed its 34th new high of the year, climbing above the 5,500 mark for the first time in the index's history, adding 1.8% on the week. The Nasdaq Composite also clinched new records, advancing almost 3.5% since Monday, and the Dow Jones Industrial Average gained 0.5% over the same period. While a relatively quiet week from a corporate news flow standpoint, a flurry of economic data, including Friday's jobs report, highlighted the week. Additionally, markets eyed Federal Reserve (Fed) Chair Jerome Powell's speech at the European Central Bank (ECB) conference.
While technology shares remained in focus and continued to lead major indexes, the consumer discretionary sector also appeared at the top of the sector rankings. Tesla (TSLA) buoyed the overall consumer discretionary sector, which contains non-essential goods and services such as entertainment, fast food, and automobiles. TSLA shares jumped on Tuesday following a second quarter vehicle deliveries estimate beat, climbing over 25% this week. The largest constituent within the consumer discretionary sector and TSLA’s Magnificent Seven brethren, Amazon (AMZN), also posted solid gains after announcing plans to invest $100 billion in artificial intelligence (AI) and data centers. Automaker Ford (F) was also a notable outperformer within consumer discretionary. Equity markets digested quite a few macro releases, which bolstered Wall Street's rate cut hopes and were broadly consistent with a cooling economy. Indexes popped following Fed Chair Powell's dovish remarks on Tuesday, stating that the U.S. has made progress towards its 2% inflation goal. Unemployment ticked slightly higher, despite expectations of remaining at 4.0%, and jobs growth eased from May. Lastly, private payrolls growth was softer than expected, and the ISM services index slipped into contraction against forecasts.
While the U.S. elections remain several months away, international elections dominated headlines. Markets in Europe faced the results of first-round voting in the French parliamentary election, and the U.K. general election. Equity indexes were choppy, rallying on Monday in relief that the far-right National Rally party did not clinch a majority, as many polls suggested. Despite a dip on Tuesday after consumer inflation matched estimates, markets rebounded on Wednesday after 200 candidates withdrew from the election. This dropout occurred as the Left aimed to unify against the National Rally party’s quest for an outright majority. Meanwhile in the U.K., markets reacted positively to the Labour Party winning the parliamentary majority, ending a 14-year Conservative party rule. The FTSE 100 in the U.K. and the French CAC 40 were both higher on the week, as well as the broader STOXX 600 index for the European region. Asian indexes were mostly higher on the week.
Turning to Asia, Japan's Nikkei climbed above the 40,000 mark again on the back of technology names and in reaction to economic data. The Hang Seng also received a boost from tech and delivered a slight gain, however struggles continued for mainland China. Chinese benchmarks ended the week in negative territory despite state-funded ETF buying on Friday to shore up equities. In addition, the People's Bank of China (PBOC) announced plans to tap financial institutions to borrow bonds to slow the months-long bond rally. India reached record highs again, and Taiwan re-approached record levels.
Fixed Income: The Bloomberg U.S. Aggregate Index traded higher this week as Treasury yields, across the yield curve, were lower after Friday’s job report. The 10-year Treasury yield was lower by over 0.10% on the week, whereas the monetary policy-sensitive 2-year yield was lower by over 0.15%. Despite the bull steepening (the 2-year yield fell by more than the 10-year), the U.S. yield curve remains deeply inverted. LPL Research expects the curve will likely stay inverted throughout 2024 but forecasts the curve to return to its upward-sloping shape in 2025.
Despite a holiday-shortened week, bond markets were mainly focused on the plethora of jobs data along with ISM data releases. The week’s economic data, which came in generally softer than expectations, has caused the bond market to fully price in two rate cuts this year, with the first expected in September. LPL Research agrees with current pricing and expects the Fed to start to reduce rates later this year. Next week, the bond market will pay close attention to the CPI data (Thursday) and regularly scheduled congressional testimony from Fed Chair Jerome Powell (Tuesday and Wednesday). Further softening of inflationary pressures could provide an additional tailwind to bond prices (lower yields).
Commodities: The Bloomberg Commodity Index gained ground this week, advancing by almost 1.7%. West Texas Intermediate (WTI) crude prices rose to start the month of July, adding around 2.2% for its fourth straight weekly gain. Weekly data from the Energy Information Administration helped lift prices, showing a larger-than-expected drop in inventories — albeit ahead of adjustments by refiners for Hurricane Beryl. The July holiday and vacation season typically ushers in a period of stronger gasoline demand in the U.S. At the same time, oil market analysts focus on weather-related charts for indications regarding the unfolding hurricane season.
Despite a slow start on Monday and Tuesday, gold futures advanced nearly 2.3% this week, supported by further signs the U.S. economy is slowing. Metals broadly rose this week as ETFs continued to buy gold and silver, while selling palladium. However, palladium gained ground this week, along with silver and copper. In forex, the dollar index edged down following this week's macro releases. Turbulence continued early this week for the Japanese yen, which briefly reached a new 38-year low intraday on Tuesday, but the currency saw some relief Thursday and Friday. The euro was stronger this week, taking election results in stride. In soft commodities, corn, soybeans, and wheat rebounded slightly as traders eyed U.S. crop conditions, although the grains are still hovering near 2024 lows.
Economic Weekly Roundup
Downward Revisions to Prior Months in June Payrolls Report. Nonfarm payrolls grew by 206,000 in June with a slight uptick in the unemployment rate. Excluding government activity, private payrolls grew by 136,000 with concentrations in social assistance, healthcare, and construction. The unemployment rate rose to 4.1%, the highest since 2021. The long-term unemployed accounted for over 22% of all unemployed people in June, indicating some early signs of a cooling labor market. Both retail and professional services payrolls declined in June, including a decline in temp help. The previous two months were revised downward by 110,000, typical for a business slowdown.
The increase in the unemployment rate, especially for those with at least a bachelor’s degree, suggests a modest cooling of the labor market. So far, we don’t anticipate apocalyptic signs within the labor market, but investors should be wary when the labor market is supported by government payrolls. The downward revisions to the previous two months are consistent with an economic slowdown. We should expect more rhetoric from the Fed about labor market conditions and the importance of keeping policy appropriate for their dual mandate.
Quits Rates in Leisure and Hospitality Below Pre-pandemic Levels. The quits rate, which tends to be disparate across sectors, can serve as a measure of a worker’s willingness to leave a job. Quits rates in healthcare jobs are still elevated, suggesting the sector’s wages have more upside to keep workers happy. Churn in construction jobs is higher than normal as employers still find it difficult to keep workers on the payroll. The openings to unemployed ratio, a favorite metric of Chairman Powell, was unchanged from the previous month and matches pre-pandemic ratios. Hiring is strongest in the South and weakest in the Northeast, which has important ramifications for the housing market in these regions.
A tight labor market in healthcare and social assistance could bolster wages in these sectors, putting pressure on margins. But overall, job openings in higher-paying roles are moderating as the labor market has revealed early signs of cooling. As long as the job market is stable, a soft landing appears likely as consumers will have some capacity to spend. However, a strong labor market will make the Fed’s job more difficult in their efforts to get inflation closer to their 2% target.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: New York Fed 1-year Inflation Expectations (June), Consumer Credit (May)
Tuesday: NFIB Small Business Optimism (June), Fed Chair Powell Senate Banking Testimony
Wednesday: MBA Mortgage Applications (July 5), Wholesale Trade Sales (May), Wholesale Inventories (May final), Fed Chair Powell House Financial Testimony
Thursday: CPI (June), CPI ex Food and Energy (June), CPI Core Index (June), Real Average Hourly Earnings (June), Real Average Weekly Earnings (June), Initial Jobless Claims (July 6), Continuing Claims (June 29), Monthly Budget Statement (June)
Friday: PPI Final Demand (June), PPI ex Food and Energy (June), PPI ex Food, Energy, Trade (June), University of Michigan Sentiment report (June preliminary)
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