Global markets experienced a long overdue bout of volatility in a holiday shortened ‘back to work/summer is over’ week as a stark reminder of the strong central bank influence on market sentiment. Thursday-Friday was effectively a one-two punch by the ECB and Fed, with each of them underwhelming market hopes for more stimulus and/or cation with regard to raising interest rates. The ECB on Thursday did not address potential scarcity issues with regard to its bond buying program, leaving it unchanged, and also left their interest rate policy unchanged. Boston Fed President Eric Rosengren contributed to market jitters on Friday by making a speech indicating a ‘reasonable’ case for the Fed to entertain rate hikes looking forward. The S&P 500 had its worst day since the post Brexit selloff at the end of June. Bespoke noted that Friday’s range for the S&P 500 was greater than the entire intraday high/low range of the index going back to 7/13 and hadn’t moved over 1% in 43 trading days (all-time record is 62 consecutive days circa 2014). Notably, international equity markets were more resilient than domestic markets last week.
Market anxiety impacted both equity and fixed income markets. Equity market volatility (VIX 17.5) jumped nearly 40% off extraordinarily low levels of the past several weeks while the yield curve steepened materially and yields spiked from as low as 1.52% during the week to close at 1.67%. Currently, futures markets are assigning a 24% chance of a rate hike in September and a 55% chance in December.
Economic reports were relatively limited last week. Job openings by private and government employers hit a new all-time high in the month of July, reinforcing the robust view of the job market. WTI oil rallied sharply (+4%) midweek on news that crude inventories declined by 14.5mm barrels, when they were expected to increase by 905k barrels. To place that inventory spike in perspective, since 1983, there has only been one other week where weekly inventories increased by such a large amount (1/1/99). A miss on Tuesday’s ISM non-manufacturing (51.4 vs 55.0 expected) report followed last week’s disappointing ISM manufacturing report. The services reading this week was a particularly big miss; the biggest since November 2008.
