U.S. equity markets closed at fresh record highs last week while Treasury yields declined.  A good start to corporate earnings, moderate economic data, and what was deemed dovish testimony from Janet Yellen all played into the week’s narrative.  U.S. dollar weakness continued to play a supporting role in non-U.S. equity market strength. Both developed and emerging markets posted strong gains on the week with the latter leading all asset classes thus far in 2017, up over 24%.

Weekly Anecdotes:

  • Janet Yellen’s congressional testimony was a primary focus last week.  She didn’t deliver any surprises other than maybe coming off more dovish than expected, which the market appreciated.  The Fed’s hawkish rhetoric seems to be fading in sympathy with soft inflation data. September and December rate hike probabilities, per Bloomberg WIRP, have fallen to 13% and 47% respectively.  December’s probability had topped 62% during the second quarter.
  • Summary of key Fed comments included one more hike this year with hikes to extend over the next few years, current rates not too far from neutral, commitment to a 2% inflation target, and unsustainably low unemployment.  She noted ‘tapering’ will begin sometime this year, either September or December, and should not be viewed as a policy tool (very gradual unwind). The Fed’s intent is to return to a Treasury only portfolio after unwinding their $1.8t mortgage-backed securities holdings.
  • FactSet expects 2Q earnings growth for the S&P 500 of 6.6% and revenue growth of 4.8%.  Earnings ‘ex-energy’ are expected to post 3.8% growth – a pronounced energy skew given its 387% expected earnings growth for 2Q – due to trough oil prices one year ago.  Earnings season kicked off in earnest last week on a sound note with an encouraging number of upside surprises, particularly in the financials – passed stress tests, deregulation, and steepening yield curve all contributing to the positive backdrop on the banking sector.
  • The Bank of Canada is joining the ranks of other central banks leaning toward tightening conditions.  Strengthening economic conditions have Canadian overnight swaps pricing in two 25bps hikes over the next 3 months, bringing Canadian rates near the level of U.S. rates.
  • Bespoke pointed out the remarkable breadth (# of companies advancing versus declining) across the financial sector.  100% of financial sector stocks have closed above their 50 day moving averages only 21 of 4,157 trading days (0.5%) since 2001 and 5 of those 21 happened in the first week of July.

Economic Updates:

  • Core CPI is amid one of its weakest 4-month stretches in over 60 years, managing only a 0.1% rise in June.  Headline and core CPI grew at annual rates of 1.6% and 1.7% respectively. Moderating housing, apparel, and transportation prices all contributed to the weak inflation report.  Wireless telephone service prices again posted a sizable decline of 0.8% in June.
  • Retail sales unexpectedly fell 0.2% in June.  This suggests the consumer spending component of 2Q GDP will not be very additive.  A surprising lack of consumer spirit, given strong sentiment readings is posing a real quandary to economic forecasters.
  • The Labor Market Conditions Index revealed cycle high ‘quit’ rates which place pressure on employers to hire at current market wages, a good sign of labor confidence and wage growth going forward.
  • Jobless claims for the week came in at 247,000, the 123rd consecutive week below 300,000.  The smoothed 4-week average now sits at 245,750 which is just 10,000 above the multi-decade low of 235,500 back in May.  Job market is rocking.