Market Update: Tuesday, July 31, 2018

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Daily Insights

  • Eurozone growth moderates as inflation picks up. Second quarter gross domestic product in the euro-area economy came in at its weakest level in two years (+0.3%) as inflation (+2.1%) breached the European Central Bank’s (ECB) 2% level for the first time since 2012, largely due to rising energy prices. While the data support ECB president Mario Draghi’s comments last week in which he suggested some of the sluggishness seen in the first quarter would continue, he and other policymakers continue to expect sustained broad-based growth in the region and remain likely to begin winding down quantitative easing later this year, though he acknowledged that uncertainty around trade policy remains a key risk.

  • Inverted yield curve not the edge of the cliff for stocks. Supporting data LPL Research published recently, a major news outlet–citing figures from Credit Suisse–showed that an inversion of the yield curve has historically not spelled doom for equities, at least not imminent doom. And with the difference between two-year and 10-year Treasuries hovering just under 30 basis points (0.30%), we’re not even there yet. In fact, history shows that the S&P 500 Index didn’t peak for more than 19 months on average after the yield curve inverted, providing another arrow in the bulls’ quiver to suggest stocks still have room to run.

  • Yields steady following reassurance from BOJ. Global sovereign debt yields are little changed to slightly lower this morning as the Bank of Japan (BOJ) pledged to keep its ultra-easy monetary policy in place for “an extended period of time.” While the market largely expected current policy to remain in place in the short-term, investors were looking for any sign of a more hawkish approach from the BOJ after reports surfaced last week that tweaks to the asset purchase program were being considered. We continue to believe that U.S. Treasury yields will rise gradually, but that attractive valuations relative to foreign debt such as Japanese government bonds should help to contain yields, and maintain our year-end forecast of 2.75-3.25% for the 10-year Treasury yield as discussed in our Midyear Outlook 2018.

  • A tough stretch for high-quality bonds. The 10-year Treasury yield has more than doubled since bottoming in July 2016, and high-quality bonds have experienced a challenging environment. The Bloomberg Barclays U.S. Aggregate Index delivered a negative return over the period since the 10-year Treasury yield bottomed, and Treasuries fared worse. While we believe long-term Treasury yields could continue to rise, we have already seen indications that the pace of interest rate increases has slowed and believe high-quality fixed income becomes even more important for suitable investors’ portfolios as the business cycle continues to age. We’ll explain why at noon eastern on the LPL Research blog.

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Tuesday

  • PCE Core MoM (Jun)
  • Chicago PMI (Jul)
  • Eurozone: CPI (Jul)
  • Eurozone: GDP (Q2)
  • Italy: GDP (Q2)

Wednesday

  • Markit Mfg. PMI (Jul)
  • ISM Mfg. (Jul)
  • Fed: FOMC Rate Decision
  • Italy: Markit Mfg. PMI (Jul)
  • France: Markit Mfg. PMI (Jul)
  • Germany: Markit Mfg. PMI (Jul)
  • Eurozone: Markit Mfg. PMI (Jul)
  • UK: Markit Mfg. PMI (Jul)

Thursday

Friday

 

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