I. What Moved Markets Last Week
- Stocks capped a volatile week with losses after Fitch downgraded its U.S. credit rating below the top AAA level to AA+. The 10-year Treasury yield swung nearly 13 basis points lower to end the week at 4.06% after briefly climbing to about 4.2% earlier. Closing the busiest week in the second quarter earnings season, Amazon jumped more than 8% to its highest price in nearly a year following a strong beat and raise, while Apple fell nearly 5% after reporting lower revenue than the previous year’s quarter. For the week, the Dow dropped 1.1%, the S&P 500 slipped 2.3%, and the Nasdaq tumbled 2.8% as per Bloomberg data.
- Fitch said it expects U.S. finances to deteriorate over the next three years. Part of that deterioration is thanks to the higher interest the Treasury now pays on its debt. In the meantime, the Federal Reserve’s continuing runoff of its Treasury holdings, up to $60 billion a month, requires the government to sell more to the public. The scale of future increases of longer-term debt issuance will depend on the fiscal picture and on how long the Fed keeps shrinking its bond portfolio, the Treasury said Wednesday.
- A narrative of declining inflation has recently fed a Goldilocks narrative in terms of the U.S. economy. However, indications on inflation, such as the Cleveland Fed CPI Nowcast, suggest a robust 0.4% gain in core prices in July and further monetary tightening may be necessary.
- The U.S. government withdrew its offer to buy 6M barrels of oil to replenish the Strategic Petroleum Reserve as crude prices continue to rise, having just seen their best monthly gain in over a year.
- Nonfarm payrolls increased 187,000 last month following a similar advance in June, a Bureau of Labor Statistics report showed Friday. The unemployment rate unexpectedly dropped to 3.5%, one of the lowest readings in decades.
- Labor productivity improved to its highest point in the second quarter in nearly three years, helping to offset rising labor costs. Productivity, or nonfarm business employee output per hour, rose at a 3.7% annual rate in the second quarter according to figures from the Bureau of Labor Statistics.
- According to Goldman Sachs and Bloomberg data, 84% of the S&P 500’s market cap companies have reported. Earnings are beating estimates by 7.2%, with 75% of companies topping projections, while only 59% of firms have beaten revenue expectations. The current percentage of revenue beats is at the lowest level in three years.
II. Looking Ahead
- The pace of earnings will slow down, with only 3% of the S&P 500 reporting this week, including updates from United Parcel Service, Disney, Eli Lilly, and Alibaba.
- The bond market will be in the spotlight again, with large auctions of 3- and 10-year notes and 30-year bonds at higher amounts than originally forecast and yields on the rise.
- Attention shifts back to inflation data itself, with markets potentially vulnerable to an upside surprise with the July CPI release. The economic data calendar slows down thereafter, and market volatility could calm down. However, in relatively illiquid summer markets, equity prices could overshoot given a sufficient catalyst.