Last Week’s Market Activity
- Trading was volatile, highlighted by Thursday’s broad sell-off, only to recover Friday with major domestic indexes finishing barely higher.
- Minutes from Fed’s June meeting indicated members willing to begin balance sheet reduction sooner rather than later.
- ISM Manufacturing and Services data came in very strong.
- June jobs report indicated economic strength (details above).
- Global sovereign bond yields jumped on FOMC minutes, European Central Bank (ECB) minutes that suggested potential for reduced bond buying due to improving economic data. U.S. 10-year Treasury yields +10 basis points (0.1%) at 2.39%; German 10-year bund yield up to 0.57%, doubling in past two weeks.
- Bank of Japan committed to further “curve control” on Friday, indicating further commitment to quantitative easing (QE), weakening the yen. Comments boosted exporters and Nikkei.
Overnight & This Morning
- Asian stocks up for first time in three days, led by technology; most indexes up ~0.4%.
- Weaker yen ($114 USD) spurred a rebound in Nikkei (+0.8%) despite political headwinds for PM Shinzo Abe, whose poll ratings slumped to record lows after a cabinet reshuffle.
- China Consumer Price Index (CPI) +1.5% year over year in June; Producer Price Index (PPI) +5.5%, in line with expectations (details below).
- European stocks broadly higher, Euro Stoxx 600 +0.4% midday.
- Most sovereign yields climbed, yet the bund firmed around 0.55%.
- Euro slipped to $1.13 USD.
- ECB debate over QE intensifying as several members’ speeches offered differing opinions.
- Commodities – Agriculture dominated trading, wheat jumped more than 3%, soybeans rallied for 10th day amid dry weather across much of U.S.
- WTI crude -0.7% to $43.95/bbl.
- COMEX Gold -0.4% ($1207/oz.), copper fell 0.2%.
- U.S. equities up slightly, Nasdaq tracked rallies in global technology shares.
- Treasury yields lower by ~2 basis points (0.02%) with 10-year at 2.36%, 2-year at 1.39%.
- Dollar weakened after Friday’s jobs data showed subdued wage increases.
- In Washington, Treasury Secretary Steven Mnuchin said White House absolutely committed to getting tax overhaul proposal through Congress by year end with plan release by early September; Senate Republicans continue to clash about path forward for stalled healthcare bill.
- According to EPFR Global, U.S. equities had outflows (-$4.7B) for the week ending July 5. Redemptions in eight of past ten weeks. Bond fund inflows of $3.9B last week.
- June jobs report. Nonfarm payrolls climbed +220k last month, well ahead of expectations for +178K and the disappointing May print of +138K, which was revised upward to +152K. Overall, it was a very good report for those concerned about economic weakness. Average hourly earnings rose +0.2% and were below expectations for +0.3%, but the year-over-year rise of just 2.5% further indicates lack of inflationary pressures, potentially limiting the Federal Reserve’s (Fed) argument for a more aggressive tightening campaign. The Federal Open Market Committee (FOMC) should remain on target for a December rate hike, with gradual balance sheet reduction to begin in late 2017 or early 2018.
- Q2 earnings preview. Consensus expectations are for S&P 500 Index operating earnings per share (EPS) of +7.0% in Q2 vs. ~14% in Q1 on revenue growth of ~5+%. This would be the fourth consecutive quarterly EPS gain, and although year-over-year comparisons will be more difficult than Q1, EPS growth in the high single digits will potentially be necessary for stocks to break out of current their trading range. Over the past five years, companies have been beating expectations by roughly +3.5%, and if that trends holds, EPS gains could come in near 10% which could significantly improve the markets trajectory. Thus far, just 5% of companies have reported, with 78% beating expectations.
- China data. Chinese inflation came in as expected, with CPI at 1.5%, matching May’s increase but falling short of estimates. The data itself can be less important than how the Chinese government reacts to it. Combined with the data received last week, the economy is still growing, though at a slower rate. This gives the government room to continue to try to reduce leverage in the economy and create a functioning, western style bond market. However, no major reforms are expected until after the fall meeting of the Communist Party.
- G20 meeting. Despite the G20 meeting and some economic data, no major developments occurred over the weekend; nothing appears to be changing the course of policies, domestic or foreign.
- Bitcoin ownership has been a volatile experience. LPL Research has received a number of inquiries regarding bitcoin, and today on the LPL Research blog we will dive into the risks associated with the headline-grabbing cryptocurrency, as well as its rollercoaster-ride over the past few years.
- Japan: Money Stock (Jun)
- NFIB Small Business Optimism (Jun)
- Wholesale Sales & Inventories (May)
- Italy: Industrial Production
- Bank of England: Inflation Report Hearings
- Japan: Machine Tool Orders (Jun)
- Japan: PPI (Jun)
- China: Trade Balance (Jun)
- China: Imports & Exports (Jun)
- US Fed’s Beige Book
- UK: Jobless Claims & Unemployment Rate (Jun)
- Eurozone: Industrial Production (May)
- Bank of Canada: Rate Decision
- Japan: Tertiary Industry Index (May)
- PPI (Jun)
- Monthly Budget Statement (Jun)
- Germany: CPI (Jun)
- France: CPI (Jun)
- CPI (Jun)
- Retail Sales (Jun)
- Industrial Production & Capactiy Utilization (Jun)
- Italy: CPI (Jun)
- Japan: Industrial Production & Capacity Utilization (May)
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