Growth concerns continue to weigh on investor sentiment, but stocks enjoyed a strong week as hopes of peak inflation have grown and enabled the S&P 500 to rise +2.5% on the week and +4.7% so far in July. Last week we highlighted softening commodity prices and this week investors have been encouraged by a variety of additional disinflationary headlines ranging from earnings commentary from Tesla and rail company CSX highlighting improving supply chain conditions, news of retailers increasing discounts to clear excess inventory, and Friday’s service and manufacturing reports indicating the slowest rate of cost inflation since April 2021. Furthermore, European tail risk concerns have moderated as Russia has resumed gas supplies via the Nord Stream 1 pipeline and WTI crude prices have dipped back below $100/barrel. Perhaps adding momentum to this equity market bounce, particularly for growth and tech stocks, interest rates have meaningfully pulled back and the 10-year US Treasury is yielding around 2.76%, near its lowest market closing levels in months.
Next week will be far busier as it relates to market events and data releases, so we anticipate an increase in market volatility. On Wednesday, the market is pricing in an 80% chance of another 75-basis point (0.75%) interest rate hike from the Federal Reserve. On Thursday, the first reading for second quarter US GDP will be released with consensus estimates looking for 1.3%, and we suspect this report will garner outsized attention as fears of recession grow and Q1 GDP saw a -1.6% decline. Friday will see the Fed’s supposed preferred inflation gauge, the personal consumption expenditure (PCE) as well as the final July reading for consumer sentiment that will include an inflation expectations component that investors have recently watched very closely. Underlying all of these macroeconomic data releases, will be the second quarter (Q2) earnings season ramping up with releases from mega cap stocks including Microsoft, Apple, Amazon, Google, and Facebook.
Two weeks ago, former Prime Minister Shinzo Abe was assassinated, and we have been rather surprised at how little press he has garnered as financial media has seemed more interested in chronicling the saga between Twitter and Elon Musk than the death of the longest-serving leader in modern Japanese history and the third largest economy in the world. During Shinzo Abe’s second stint as Prime Minister from 2012 to 2020, Mr. Abe attempted to jumpstart a long stagnant economy and battle more than two decades of deflation by adopting a system of “three arrows” (monetary easing, fiscal stimulus, and structural reforms) that would later be dubbed “Abenomics”. It is very debatable whether Abenomics’s worked, particularly with the Japanese yen at 24-year lows versus the US dollar, but it is undeniable that Shinzo Abe had an indelible impact on Japan.
Ian G. Browning, CFA
Managing Director, Investment Strategies | Shareholder
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