Last Week In Review
Last week’s stocks erased much of the previous week’s losses on optimism that the Federal Reserve will be able to curb inflation without tipping the economy into a recession. The gains pulled the S&P 500 Index out of “bear market” territory, leaving it down 19.1% from its January peak at the close of trading Friday. The extensive communication services, consumer discretionary, and information technology sectors performed best within the index. Energy shares fell sharply on Tuesday (markets were closed Monday in observance of Independence Day) as domestic oil prices fell back below USD 100 per barrel for the first time in nearly two months. Still, they rallied alongside crude prices later in the week.
US – Markets & Economy
Last week’s heavy, if abbreviated, calendar of economic data appeared to dominate sentiment as investors sought to assess the possible impact on Fed policy. On Wednesday, S&P Global and the Institute for Supply Management (ISM) released their final estimates of services activity in June, which came in modestly above consensus estimates but indicated a continuing slowdown in growth. According to Reuters, the ISM’s measure hit its lowest level since June 2020, and its employment gauge fell into contraction territory for the third time this year.
The most closely watched data came in the form of Friday’s payrolls report from the Labor Department, which showed employers added 372,000 nonfarm jobs in June, well above consensus expectations of around 270,000. While the 0.3% increase in average hourly earnings was in line with expectations, investors may have been concerned that May’s gain was revised slightly higher, from 0.3% to 0.4%. For the 12 months, earnings grew by 5.1%, marking the third monthly deceleration from March’s peak of 5.6%. Payroll processing firm ADP announced that it was suspending until August its monthly tally of private payrolls as it adjusted its methodology. The ADP and official reports have differed widely in recent months.
Traders I spoke with noted that the moderating economic data may have prompted some investors to brush off the hawkish stance that the Federal Reserve reiterated in its June meeting minutes, which were released on Wednesday. The minutes also revealed that policymakers acknowledged that “risks included the possibility that a further tightening in financial conditions would have a larger negative effect on economic activity than anticipated.”
Fed officials continued to publicly state their resolve to raise rates as much as necessary to keep inflation expectations anchored, with Fed Governor Christopher Waller telling an economists’ conference on Thursday that “we’ve got to chop this off now.” By the end of the week, federal funds futures tracked by CME Group were no longer pricing in any chance that the Fed would hike rates by less than 75 basis points (bps) at its upcoming policy meeting—and were even anticipating a slight possibility of a 100bps hike.
US – Equity Market Performance
|Index||Friday’s Close Week Ending 7/8/2022||Weekly (+/-) Point Change 7/8/2022||% Change YTD Week Ending 7/8/2022|
|S&P Midcap 400||2,320.40||24.51||-18.35%|
SOURCE: BLOOMBERG. THIS CHART IS FOR ILLUSTRATIVE PURPOSES ONLY AND DOES NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. PAST PERFORMANCE CANNOT GUARANTEE FUTURE RESULTS.
US Yields & Bonds
The stronger-than-expected jobs report lifted the yield on the 10-year U.S. Treasury note to roughly 3.10% at the close of trading on Friday amid a broad rise in U.S. rates. The closely watched 2-year/10-year segment of the Treasury yield curve inverted as the 2-year yield climbed above the 10-year yield—a common, if imperfect, a signal of a coming recession. Portfolio managers noted that minutes released Wednesday from the Federal Reserve’s June policy meeting bolstered investors’ expectations for a higher terminal federal funds rate, supporting higher yields across the curve.
Investment-grade corporate bonds were under pressure at the start of the week, led by more volatile and less liquid issuers. Technical conditions were mixed as trading volumes in the secondary market remained lower than daily averages, while long-term bonds saw healthy overnight demand. Outperformers included bonds in the banking and technology, media, and telecom (TMT) sectors, while the energy and auto sectors lagged.
Our traders observed that buyers were active in the high yield bond market when it opened after the holiday weekend. Most of the market’s appreciation followed the release of the Fed’s meeting minutes. Our traders noted that the BB credit quality tier fared better as CCC-rated bonds underperformed and traded less frequently. However, the primary market was fairly quiet, with only one new deal announced.
US Treasury Markets – Current Rate and Weekly Change
3 Mth +0.24 bps to 1.88%
2-yr: +0.27 bps to 3.10%
5-yr: +0.24 bps to 3.12%
10-yr: +0.22 bps to 3.10%
30-yr: +0.14 bps to 3.24%
SOURCE: FOR THE WEEK ENDING July 8, 2022. BLOOMBERG. YIELDS ARE FOR ILLUSTRATIVE PURPOSES ONLY AND DO NOT REPRESENT THE PERFORMANCE OF ANY SPECIFIC SECURITY. YIELD CHANGES ARE FOR ONE WEEK. PAST PERFORMANCE CAN NOT GUARANTEE FUTURE RESULTS.
Interesting News Overseas
Shares in Europe advanced in the first week of July after three consecutive months of losses. However, the gains appeared to be restrained by China’s reimposition of some restrictions designed to curb the spread of the coronavirus and worries that an energy shortage might cause a recession in Europe. The pan-European STOXX Europe 600 Index ended the week 2.45% higher in local currency terms. Germany’s Xetra DAX Index rose 1.58%, France’s CAC 40 Index gained 1.72%, and Italy’s FTSE MIB Index added 1.96%. The UK’s FTSE 100 Index tacked on 0.38%.
The minutes of the European Central Bank’s (ECB) June meeting showed most members agreeing to a 25-basis-point increase to the deposit rate in July and leaning toward a 50-basis-point move in September. The Governing Council noted, “it was widely felt that there was no room for complacency given the high costs of re-anchoring [inflation] expectations.” The minutes also clarified that “gradualism” in tightening monetary policy does not rule out larger rate increases.
Boris Johnson announced his intention to resign after more than 50 ministers and several Cabinet members stepped down in protest at his handling of a series of scandals that have rocked his administration. Despite calls for Johnson to step down, he said he would remain caretaker prime minister until the Conservatives chose a new party leader.
Sad news in Japan as Campaigns for the parliamentary upper house election on July 10 was suspended after Shinzo Abe, Japan’s former and longest-standing prime minister, was shot and killed while giving a campaign speech in the western city of Nara. According to recent polls, the ruling Liberal Democratic Party (LDP) and its junior partner, Komeito, are on track to win a majority. After stepping down in 2020, Abe remained influential as a member of parliament and head of the LDP. The basic tenets of Abe’s signature economic policy, “Abenomics,” built on the three pillars of monetary easing, fiscal stimulus, and structural reforms, have been mainly retained by current Prime Minister Fumio Kishida’s government.
Japan’s stock markets gained during the week, with the Nikkei 225 Index up 2.24% and the broader TOPIX Index is gaining 2.30%. In the fixed income markets, the yield on the 10-year Japanese government bond (JGB) rose to 0.24% from 0.23% at the end of the previous week. The Bank of Japan (BoJ) set a monthly record in June in its JGB purchases as it sought to stem the rise in long-term yields above the 0.25% cap it has placed under its policy of yield curve control.
The central bank’s dovish stance has weighed heavily on the yen, which weakened to around JPY 135.90 against the U.S. dollar from the prior week’s 135.22, remaining around its lowest levels in 24 years.
This Week Ahead
In the US, the start of the earnings season and inflation rate release will take center stage next week. PepsiCo kicks off major reports on Tuesday, followed by Delta Air Lines on Wednesday, JPMorgan Chase and Morgan Stanley on Thursday, and Wells Fargo, Citigroup, and PNC Financial on Friday. Second-quarter earnings for the S&P 500 are expected to grow by 5.7%, according to Refinitiv. On the data front, the annual inflation rate is seen rising to 8.8%, which would be the highest reading since December of 1981, pushed once again by energy costs. Core inflation, however, is expected to slow for a third month to 5.8% from 6%. Also, retail sales are rebounding; manufacturing production will likely stall in June, while the Michigan consumer sentiment is expected to sink to a new record low this month. Other important data include the NFIB Business Optimism Index, consumer inflation expectations, producer prices, export and import prices, business inventories, and the NY Empire State Manufacturing Index.
Have a great week!
Stephen Colavito, Jr.
Chief Investment Officer
Perigon Wealth Management, LLC
This message is provided for informational purposes and should not be construed as a solicitation or offer to buy or sell securities or other financial instruments. Past performance is not a guarantee of future results. Perigon Wealth Management is a registered investment adviser. More information about the firm can be found in its Form ADV Part 2, which is available upon request by calling 415-430-4140 or sending an email request to Compliance@PerigonWealth.com