There was an onslaught of data last week, which led to gains. Should more be expected with the coming earnings season?
Monday S&P 500 0.27%| NASDAQ 1.09%
ISM Manufacturing unexpectedly slipped and remains in contractionary territory. The weaker economic data would typically signal lower rates as rate cut expectations would increase. To the contrary, 10-year treasuries rose on the day. In the face of weak economic data, the start of the quarter brought optimism towards the next three months.
Tuesday S&P 500 0.62% | NASDAQ .84%
JOLTs job openings rose more than expected to 8.14M openings. For perspective, there were 6.6M unemployed as of the May report. The strong jobs data did not deter markets, though; this may be because the Federal Reserve Board (FRB) Chair, J. Powell, spoke on the day. He indicated that progress is being made towards their inflation target. This is the ‘secret sauce’ needed to justify future rate cuts.
Wednesday S&P 500 0.51% | NASDAQ 0.88%
Initial jobless claims rose for the week to 238K from 234K; the level remains elevated, albeit from all-time lows. Factory orders unexpectedly slipped into the negative on the month. Additionally, ISM Services unexpectedly slipped into contractionary territory. This is all bad news for economic production, so why did the markets rise? Interest rates fell as this data increases the likelihood that the FRB will lower rates sooner than expected. The heightened odds are now calling for a .25% cut in September and December, according to CME FedWatch.
Thursday S&P 500 -% | NASDAQ -%
Happy Independence Day!
Friday S&P 500 0.54% | NASDAQ 0.90%
Happy Jobs Friday! The unemployment rate rose to 4.1%, Nonfarm payrolls beat expectations, and participation rose to 62.6% from 62.5%, all for June. The unemployment rate went up even though we added 206K jobs??? Participation went up so, with more people in the market, the rate can go up even as jobs are added. This is a positive signal that workers are returning to the work force. The rise on equity markets, however, was on hopes that economic weakness would be enough for an FRB rate cut.
Conclusion S&P 500 1.95% | NASDAQ 3.55%
This was a busy week for economic data, especially for a holiday shortened week. We got weaker Jobs, manufacturing, Services, and Factory orders. The weakness led to stronger markets on hopes the FRB will cut rates BEFORE a recession can materialize. The coming week starts second quarter earnings. Valuations are stretched (S&P 500 P/E: 28.94) and economic production is weak, very little should be expected from this season. This could be the start of volatility that would lead into the Autumn.
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Taper Tantrum 2.0 looks inevitable, but will it be as bad as last time?
Monday
The S&P 500 dug itself quite the hole on Monday morning. It spent the whole day climbing out of it and successfully closed 0.2% higher on the day. Strong earnings from Home Depot and Walmart buoyed markets.
Tuesday
Broadly, markets fell on Tuesday. Relinquishing all the effort from Monday’s trading activity. The S&P 500 fell 0.7%. Retail sales fell 1.1%, while a 0.7% increase was expected. The hit to consumption sent a shock through markets. The prevailing thought was, perhaps the re-opening trade will not last as long or as strong as many had expected.
Wednesday
After remaining stable most of the day, markets sold off in the closing hour of trading. The S&P 500 lost 0.85%. This was in response to Federal Reserve Board (FRB) minutes. They indicated tapering of their bond purchase program ($120B/month) may end sooner than most investors expected… Queue ‘Taper Tantrum 2.0’.
Thursday
Despite a volatile day, markets were little changed as the S&P 500 gained 0.1%. Initial jobless claims continue to impress as 348K jobs were lost. While 75% higher than pre-pandemic levels this is the lowest level since the beginning of the pandemic!
Friday
The markets bounced on Friday, as the S&P 500 rose 0.8% on the day. This did not erase the losses from the week but did manage to more than half those losses. The economic data and earnings calendars were light on Friday. This came more as a comeback bounce from the previous volatility. With all the concerns, the weekend news cycle was not one of them…
Conclusion
The last Taper Tantrum occurred in 2013 when the FRB decided to start trimming its bond purchase program ahead of rate increases in 2015. This is a form of monetary tightening. When the FRB buys bonds they go on their balance sheet and the money they paid goes into the economy (currently $120B/month). As they slow those purchases, less money is being infused into the economy. This time the FRB is attempting to telegraph the decision to taper bond buying as to not shock bond markets. These attempts will help, but regardless of their efforts markets will still react adversely to a tightening of monetary policy.
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Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.