A lot of investors and traders appeared to be on vacation last week based on the overall lack of movement in stock prices, although those that were around were selling long-term bonds.
In the U.S., the major equity averages ended narrowly mixed, as the Dow gained 0.2% for the week, the S&P 500 recorded a marginal gain, and NASDAQ fell 0.1%. About the only index to show a sizeable change was the S&P SmallCap 600, which gained a full percentage point as trade tensions continued to rattle the markets; small companies are viewed as having less exposure to foreign trade. Overseas markets were likewise little changed. In Europe, the Stoxx Europe 600 and Germany’s DAX index both rose 0.2%. In Asia, Japan’s Nikkei 225 gained 0.4% while the Shanghai composite fell 0.1%. Oil prices lost 1.0%, their third straight weekly decline.
Bond prices were weaker, especially on the long end, raising yields by the most in two months. In the U.S. Treasury market, the yield on the benchmark 10-year note rose seven basis points on the week to close just below 2.90%, its highest weekly close in a month. The yield on the 30-year bond jumped 10 bps to 3.03%, its first close above 3% since June 26. Yields on the short-end of the curve were unchanged or slightly higher. In Europe, the yield on the benchmark 10-year German bund closed at 0.37%, up nine bps on the week, its highest level since June 20; just about all of the increase came on Friday.
Federal Reserve Chair Jerome Powell delivered his semiannual testimony to Congress last week, which later caused a minor storm when President Trump came in for criticism for allegedly disrespecting the Fed’s independence. Powell told the Senate Banking Committee that given the strong economy and rising inflation, “the best way forward is to keep gradually raising” interest rates. That didn’t sit well with the president, who told CNBC that “I’m not thrilled” about the Fed’s tighter monetary policy. “Because we go up [economically] and every time you go up they want to raise rates again. I am not happy about it.” That led to widespread criticism that Trump was flouting tradition and putting political pressure on the Fed to lower rates or hold them steady. However, Larry Kudlow, Trump’s main economic adviser, dismissed the controversy. “Lots of people talk about the Fed. That doesn’t mean they’re jawboning them,” he said, adding that Trump was not “in any way, shape or form trying to influence the Fed or undermine its independence.” The Fed next meets at the end of this month.
Except for one housing indicator, last week’s reports on the U.S. economy were better than expected. Retail sales for June rose 0.5%, in line with estimates, while the May figure was revised sharply upward to a 1.3% increase from an already-strong 0.8% rise. Auto sales were behind the big increases, up 0.8% and 0.9% in May and June, respectively. Leading indicators rebounded last month, climbing 0.5% following no change in May. The Conference Board said the gain “does not suggest any considerable growth slowdown in the short-term.” Industrial production also bounced back, rising 0.6% after falling by a downwardly revised 0.5% in May, led by a 0.8% jump in manufacturing following a 1.1% drop the prior month. The Fed’s Beige Book covering late May and June was mostly positive, with labor markets “described as tight,” although there were some concerns voiced about possible negative effects from higher tariffs. The only blot on the week’s reports was an unexpected 12.3% drop in June housing starts to an annual rate of 1.173 million units, well below forecasts and the biggest monthly decline since November 2016. Both single-family (-9.1%) and multifamily (-19.8%) sectors dropped sharply. Building permits were also down.
Reports/dates/facts/links worth paying attention to over the next week:
1. July 23: Chicago Fed national activity index for June; existing home sales for June.
2. July 25: New home sales for June.
3. July 26: Weekly unemployment claims; durable goods orders for June.
4. July 27: Second quarter GDP, first estimate; University of Michigan consumer sentiment index for July, second reading.
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