Last week delivered the July 4th holiday and kicked off the second half of 2017.  The mid-week day off most definitely translated into high volumes of email auto-responses and relatively low trading volume on U.S. exchanges.  U.S. equity markets managed to post small gains, largely due to a rally in financial stocks which benefited from a steepening yield curve.

Weekly Anecdote:

  • Next week will kick off the highly anticipated second quarter earnings season where FactSet sees blended earnings growth of 6.5% and sales growth of 4.8%.
  • June FOMC meeting minutes, released last week, detail the Fed’s desire to begin shrinking the balance sheet before the end of the year.
  • CME futures are pricing very low probability of an FOMC rate move in the July, September, or November meetings but a 51% probability in December.
  • CME futures are pricing December 2018 as the first ECB interest rate hike.  Eurozone rates have been in negative territory since June 2014 and currently stand at -0.40%.  We may see an adjustment (taper) to ECB bond buying in the latter half of this year.
  • Bond market stress (rising rates) showed signs of spilling over into stocks last week as rate volatility (MOVE index) and equity market volatility (VIX index) are running at historical high correlations to one another.
  • U.S. interest rates moved higher last week, particularly on the longer end of the curve.  Two-year yields rose 2 basis points while the 10 to 30-year portion of the curve rose 8-10 basis points. Higher rates provided a boost to the bank stocks but acted as a headwind to rate sensitive REITs, utilities, and telecom stocks.
  • European rates moved higher last week as well.  Mario Draghi’s bullish comments about the Eurozone economy two weeks ago were seen as heralding tighter monetary policy.  Despite ECB attempts to talk down the bond market, European yields continued to move higher, with German 10yr bond yields moving from 0.44% to 0.57%, the highest level in 18 months.
  • The concept of imposing tariffs on foreign steel, semiconductors, paper, aluminum, and appliances reared its head again last week.  DJT, flanked by 25 administration officials and advisors made the announcement. One official estimated the sentiment in the room as 22 against and 3 in favor — but one of the three in favor is DJT, so it is indeed a live consideration.

Economic Updates:

  • June’s jobs report added a strong final chapter to the second quarter, adding 222,000 jobs.  The unemployment rate edged higher to 4.4% but that’s due to more people looking for work. Prior months were also revised higher by 47,000.
  • Wages remained dormant in June, growing at a mere 2.5% annual rate.  Weakness in wages suggests new jobs are more focused in the lower wage and lower productivity areas.
  • June ISM manufacturing jumped to a much higher than expected 57.8 level, indicating healthy U.S. manufacturing activity.  The survey reflected strength in new orders, backlog orders, employment, and production across the U.S. manufacturing economy.