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Market Movers
- Streak ends. On Wednesday, the S&P 500 broke its 356-day streak without a decline of 2% or more. The S&P's last streak without a drop of over 2% began in 2007 and went on for 943 days. The sharp mid-week decline was attributed to an AI trade unwind and weaker earnings in the luxury sector. The disparity between the Russell 2000 and the S&P 500 reached its widest levels since February 2000, up more than 9% month-to-date. By the end of the week, the S&P 500 was down 0.33% at 5,467, and Nasdaq was down 2.10% at 17,355 (at the time of writing).
- Curve swerve. This week’s yield curve steepening stalled after reaching year-to-date highs. A stronger-than-expected US gross domestic product estimate of 2.8% vs. the projected 2% reinforced the view that the Federal Reserve can wait until September to cut rates, reducing pressure on front-end yields. The closely watched 2s10s curve remains inverted at -18 basis points (bps), meaning the two-year rate is 18 bps higher than the 10-year rate. However, this is an improvement from -50 bps in late June.
- Yen surge. The yen rallied to 152 on Thursday after an unwind of FX carry trades, before paring gains. Investors expect the Bank of Japan to hike rates at the July 31 meeting to 0.0%-0.25% and reduce its purchase of Japanese government bonds from 6 trillion yen per month to 3 trillion yen per month, over two years.
Macro
- Landing zone. Despite comments from former New York Fed President William Dudley suggesting the Fed should cut interest rates at its upcoming July meeting, the markets are pricing in a very low chance of a cut then. Instead, the market anticipates a full 25 bps cut in September and an additional 43 bps in cuts by year-end. Election-related uncertainty remains prominent, with Kamala Harris now the Democratic nominee front-runner and prediction polls showing a narrowing gap between her and former President Donald Trump.
- Dimmed outlook. Eurozone purchasing managers indices fell short of market expectations on Wednesday, raising concerns about unstable European growth. After a series of weak data and sensitivity to potential US tariffs, economists revised their full-year Eurozone GDP growth forecasts from 0.8% to 0.7%.
- Easing. The Bank of Canada reduced its benchmark rate by 25 bps to 4.50% for the second consecutive month, citing significant progress on inflation and concerns about its impact on economic growth. In China, economic stimulus measures persist as growth continues to lag. The People’s Bank of China cut its open market operations rate by 10 bps on Monday and implemented a surprise 20 bps reduction in the medium-term lending facility rate on Thursday. The Bank of England is expected to lower its rate by 25 bps to 5% next week, after recent data shows significant progress in curbing inflationary pressures.
Micro
- Unrealistic expectations. Despite reporting better-than-expected revenues, shares of a major tech stock dropped this week due to concerns about the impact of rising AI investment and lack of excitement over results. The tech-heavy Nasdaq fell 3.6% on Wednesday, marking its worst one-day performance of the year.
- Headwinds. A major airline announced significant changes to its well-known practices in an effort to gain pricing power, as domestic carriers continue to face strong challenges during the summer travel season. Other airlines experienced declines in profit expectations and underperformed relative to the S&P 500, with an ETF of airline stocks down 0.24% this week.
- Driven lower. Shares of a prominent electric vehicle automaker declined earlier this week following mixed second-quarter results that indicated significantly lower growth for the year. Decreased demand and increased competition in the EV market prompted the company to cut prices to protect its margins. This trend affected other automakers as well, with a basket of auto stocks ending the week -8.4%.
Checklist for next week
- Major economic events in the US include: JOLTs Job Openings, ADP Employment, FOMC Rate Decision, ISM Manufacturing, Nonfarm Payrolls, Unemployment Rate, and Consumer Confidence.
- Major economic events around the world include: Eurozone GDP, Eurozone CPI, Eurozone PMIs, Eurozone Unemployment, BOJ Rate Decision, BOJ Economic Forecasts, BOE Rate Decision, China PMIs, Australia CPI, Canada GDP, and Mexico GDP.
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