Markets Blog
David Matzko, LPL Research
Weekly Market Performance for the week of July 8, 2024. U.S. stocks delivered weekly gains after anticipation about the latest inflation data and the start of earnings season created a quiet start to the week, with an action-packed finish. Markets experienced a significant rotation on Thursday, but 10 out of 11 sectors gained ground to push the S&P 500 higher. European markets showed short-term signs of shaking off the recent French election turbulence by the end of the week, while Asian markets also advanced. U.S. Treasury yields were broadly lower as continuing disinflation and bolstered rate-cut hopes provided a tailwind to bond prices. The U.S. dollar index pulled back again amid soft Consumer Price Index (CPI) data and an unexpected slide in consumer sentiment.
Index Performance
U.S. and International Equities
Markets: U.S. indexes continued to achieve new all-time highs on the back of artificial intelligence (AI) enthusiasm, following their recent trends. The S&P 500 notched its 35th record high, reaching 5,600 for the first time in the index's history. The S&P 500 advanced almost 1.5% on the week, while the Nasdaq composite also set new highs and finished the week around 0.9% higher, despite Thursday's tech sell-off. The Dow struggled early in the week ahead of key inflation data, but rallied late for a more than 2.0% weekly gain. Throughout the week, markets eyed U.S. CPI and Purchasers Price Index (PPI) data, in addition to Federal Reserve (Fed) Chair Jerome Powell's semi-annual monetary policy testimony.
U.S. markets were in waiting mode for much of the week ahead of inflation data and the start of second quarter earnings season. Until Thursday, sessions were relatively quiet outside of AI enthusiasm continuing to dominate headlines as popular semiconductor names delivered solid gains and powered the major indexes. The Magnificent Seven faced some mild turbulence, especially during Thursday’s tech sell-off, with five out of seven names ending lower on the week. In Thursday's session, markets rotated to small caps and interest rate sensitive pockets of the market. Tame CPI data drove price action and disinflation, combined with bolstered rate cut hopes, sparked the pause in big tech's rally. Friday's PPI release was somewhat overshadowed as bank earnings stepped into the spotlight. Big banks J.P. Morgan (JPM), Wells Fargo (WFC), and Citigroup (C) kicked off earnings season Friday morning, and all three names declined. Nevertheless, the banking sector broadly rose on the week, taking note of Fed Chair Powell stating that regulators could agree on less onerous capital requirements. Also on the reporting front, Delta Airlines (DAL) shares fell after missing earnings estimates, subsequently pulling airline names down while the broader transportation sector gained ground.
Across the Atlantic, European markets pared early losses amid cooling U.S. inflation and in the wake of the second round of French voting — the STOXX 600 added about 1.5%. No party secured the majority in the French lower house of parliament, and markets rallied in relief on Monday. In a hung parliament, the far-left earned the most seats, followed by French President Macron's centralists, while the far-right National Rally party secured the fewest number of seats. The rally fizzled on Tuesday as sentiment remains a bit shaky due to concerns over the far-left increasing both taxes and spending. However, macro data and central banks got back in the driver's seat for markets late this week. U.K. gross domestic product (GDP) released Thursday increased by 0.4% in May vs the 0.2% consensus, and inflation data for France and Spain were released Friday. European markets now focus ahead to the European Central Bank's policy decision on deck next week.
The U.S. was not the only stock market to set fresh records, as Asian markets continued to follow in Wall Street's footsteps. Asian equities surged this week, on the back of semiconductor and AI names in tech-heavy markets. Taiwan Semiconductor Company pushed Taiwan to all-time highs, while Japan and India also clinched new records. South Korea was another beneficiary of the rally, reaching multi-year highs. Following the tech slump in the U.S. on Thursday, tech-heavy Asian markets closed lower Friday. Greater China markets were choppy throughout the week after breaking a slump amid more state-funded ETF buying, this time evident among small caps. After sliding Wednesday, China rallied sharply on Thursday in the first session with new short-selling restrictions in place and secured weekly gains after ticking higher Friday.
Fixed Income: The Bloomberg U.S. Aggregate Index traded higher this week as Treasury yields fell across the curve. The 10-year yield was lower by over 0.09% on the week and the monetary policy-sensitive 2-year yield was lower by over 0.13%. Treasury yields were little changed in the first half of the week in anticipation of inflation data. However, yields tumbled following Thursday's cooler than-expected CPI release, as markets are once again front-running potential rate cuts with a full rate cut priced in for September. Although Friday's PPI data did not elicit a large reaction, yields ticked slightly lower Friday. This week's continuing disinflation narrative and increased rate-cut hopes provided a tailwind to bond prices. The bond market also kept Fed Chair Jerome Powell's testimony in focus. Powell's remarks were perceived as dovish as he highlighted holding rates elevated could jeopardize economic growth, though cutting rates too soon could reverse inflation progress
Turning to corporate credit, investment grade (IG) bond spreads at 0.90% are only 0.06% off the year-to-date tights as supply has been very light this month and quarter-end rebalancing flows have been favorable to credit. One key variable in the coming weeks will be the sensitivity of spreads to rates. The correlation between rates and spreads has been mostly negative over the past year, but at times it has flipped and currently has been trending higher. LPL Research believes as yields fall, the relative attractiveness of IG credit to yield buyers could wane and we could expect wider spreads. While IG spreads remain near cycle tights, all-in yields remain elevated for now. With a still inverted corporate yield curve, though, the short-to-intermediate part of the corporate credit universe remains attractive, from our stance.
Commodities: The Bloomberg Commodity Index traded lower this week, declining nearly 1.5%. Crude oil fell over 0.7% this week, as higher than expected Russian output and a concerning demand outlook in China, a top oil consumer, put some pressure on prices. However, travel demand and July seasonality that historically leads oil prices higher have been positive drivers. The U.S. dollar index pulled back on the week amid soft CPI data and unexpected falling consumer sentiment based on the University of Michigan survey. This marked the second consecutive decline in the dollar index, as heightened rate cut hopes also place downward pressure on the greenback. The yen experienced elevated volatility late in the week, ultimately strengthening against its peers. The currency swung between gains and losses, reflecting jitters around potential central bank intervention. Some profit-taking pressure was placed on gold futures Friday, broadly viewed as routine following the yellow metal's most recent rally. Gold gained around 1.0% this week, earning its third straight weekly gain on the back of rate-cut bets. Silver and copper were both slightly lower on the week. In soft commodities, grains continued to slump as corn and wheat remained near 2024 lows.
Economic Weekly Roundup
Headline June CPI fell by 0.1% from a month ago as energy prices declined. Markets initially seemed to like the tame reading of June inflation, as softer inflation makes it easier for the Fed to begin cutting rates at the September meeting. Services inflation also eased from a month ago. Excluding energy services, services inflation rose 0.1%, the smallest increase since mid-2021. Grocery prices continue to rise month –to month, making things difficult for lower-income households who spend a larger percentage of their income on food. Airfare prices fell 5% in June, despite healthy demand for travel. In another report, we know the number of travelers at airports recently hit another record. The Fed tracks core services ex-housing, and investors should know that the CPI metric is more volatile than the Personal Consumption Expenditure (PCE) deflator, which partially explains why the Fed prefers the deflator. Car dealers suffered a cyber attack in June, which hampered sales and likely distorted transaction data. However, the Bureau of Labor Statistics reported that despite a reduced number of observations, the pricing index meets publication criteria.
Softer inflation should allow the Fed to begin cutting rates in September as labor market data is becoming more tenuous.
The Week Ahead
The following economic data is slated for the week ahead:
Monday: Empire State Manufacturing Survey (July)
Tuesday: New York Fed Services Business Activity (July), Retail Sales (June), Import Price Index (June), Export Price Index (June), Business Inventories (May), NAHB Housing Market Index (July)
Wednesday: MBA Mortgage Applications (July 12), Building Permits (June), Housing Starts (June), Industrial Production (June), Manufacturing (SIC) Production (June), Capacity Utilization (June), Federal Reserve Beige Book release
Thursday: Initial Jobless Claims (July 13), Philadelphia Fed Business Outlook (July), Continuing Claims (July 6), Leading Index (June), Total Net TIC Flows (May), Net Long-Term TIC Flows (May)
Friday: Bloomberg July United States Economic Survey
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