We kicked off the month of August with markets falling hard with many investors taking profits while also moving to a more risk off environment. Get my take on the markets in this week’s round-up.
MARKET SOUND BITES
Stocks closed lower, as investors reacted to the busiest week of the quarterly earnings reporting season and arguably the most important week of monthly economic data. The recent rotation toward value stocks and small-caps stalled. Companies representing nearly 40% of the S&P 500’s market capitalization reported second-quarter earnings during the week, including four of the Magnificent Seven—Microsoft, Meta Platforms (Facebook), Apple, and Amazon.com. While results varied relative to consensus expectations, a common theme appeared to be expectations for heavy capital spending to build out artificial intelligence (AI) capabilities. Cap Ex spending levels in the billions as investors are beginning to get anxious of the timeline for these investments to pay off.
Sentiment dropped when Friday’s nonfarm payrolls report showed a more rapid cooling in the labor market than expected. The economy added only 114,000 jobs in July, well below expectations and the lowest number in three months—only 97,000 jobs came from the private sector, the least in 15 months. More surprising may have been a jump in the unemployment rate from 4.1% to 4.3%, its highest level since October 2021. The other event rattling faith in the strength of the economy appeared to be the Thursday release of the Institute for Supply Management’s (ISM’s) gauge of July manufacturing activity, which fell unexpectedly to 46.6, its lowest level since last November and marking nearly two years of almost continuous contraction in the sector.
Longer-term interest rates plummeted in the aftermath of both the ISM manufacturing print and the jobs data, sending the yield on the benchmark 10-year Treasury note to its lowest intraday level (3.79%) since late December. Currently, the futures markets is now pricing in a 73.5% chance of a 50 bps rate cut at the next Fed meeting in September versus only an 11.5% chance the week before.
In Britian we saw the BoE cut its key interest rate by a quarter point to 5.00%, its first reduction to borrowing costs since the start of the coronavirus pandemic in March 2020. It was a split decision, however, with the Monetary Policy Committee voting 5-4 in favor of the decision. In Europe an initial estimate showed that annual inflation in the eurozone picked up to 2.6% in July from the 2.5% registered in June. A consensus estimate had called for inflation to decelerate to 2.4%. The region’s economy in Q2 expanded a faster-than-expected 0.3% sequentially (0.6% on a year-over-year basis) while the unemployment rate ticked up to 6.5% in June from an all-time low of 6.4% in May.
In Japan, the BoJ raised its key short-term interest rate to around 0.25% from around 0% to 0.1%. This was the BoJ’s second interest rate hike this year, after exiting its negative interest rate policy in March, and came earlier than had been anticipated by many investors. In addition, the BoJ also decided on a plan to reduce the amount of its monthly outright purchases of JGBs while they lowered its core inflation outlook for fiscal 2024 to 2.5% from 2.8% and slightly cut its growth outlook to 0.6% from 0.8%.
In China the official manufacturing Purchasing Managers’ Index (PMI) slipped to 49.4 in July from 49.5 in June, marking the third consecutive monthly contraction as production and new orders declined. Persistent weakness in domestic demand has raised speculation that Beijing will continue to roll out measures to shore up the economy as recent stimulus measures have done little to boost consumption.
Enjoy this week’s market round-up.
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