Weekly Market Commentary July 22nd to July 26th 2024
There were some important economic data points released this week and all eyes seem to be focused on the Fed’s interpretation of the data. Investors are clamoring for rate cuts but look for the FOMC to be cautious with policy comments following their meeting next week. Currently there is a 4% chance of a cut next week, but a 100% chance of a cut by September; and 100% chance of two cuts by December. We remain skeptical and consider one cut by the end of the year likely. The Fed does not like to surprise the markets and will likely grow quieter as the election approaches. When they finally begin to ease, look for the program to be drawn out over many months, or even years. They will be in no rush to aggressively bring rates back down to where they were a few short years ago.
In the economy this week, the most important release was second quarter GDP, and it came in much higher than expected at 2.8%. This was a strong result and more evidence the Fed is achieving its economic soft landing. While keeping short-term rates elevated, they are maintaining economic growth while bringing inflation down and keeping employment stable. Yes, the unemployment rate has gone up, but that was to be expected when the brakes were applied to the economy. Speaking of inflation, the next big release of the week was the Personal Consumption Expenditures, or PCE. Month-over-month PCE came in at 0.1%, slightly higher than last month; and year-over-year PCE dropped from 2.6% to 2.5%; encouraging numbers showing that inflation continues its slow downward trend. Personal Income and Personal Spending for June both dropped slightly from revised May figures, but both remained strong – another good sign for this resilient economy. However, Consumer Confidence, as measured by the University of Michigan Sentiment Index, remained at an eight-month low for July due to continued inflation concerns.
Elsewhere in the economy, the big downside surprise was Durable Goods Orders. It dropped -6.6% when the consensus was a small increase. Removing the volatile transportation sector, and the numbers were more positive, coming in at +0.5% when +0.2% was expected. Lastly, in the downtrodden real estate sector, there was more bad news. Existing Home Sales dropped -5.4% when -2.9% was expected. And New Home Sales followed suit and were down -0.6% when +3.6% was anticipated. Today’s real estate sector continues to be battered by elevated interest rates and low inventory. Prospective buyers and sellers are putting off real estate decisions until rates become more favorable.
A rout in the tech sector caused the equity markets to have some mixed results for the week. A rally on Friday couldn’t stop the S&P 500 from finishing in the red at 5,459. The tech-heavy NASDAQ got hit the hardest, closing down 2.1% at 17,358. The big industrials however, eked out a small gain with the Dow Jones Industrial Average closing up 0.7% at 40,589. In the fixed income markets, the curve steepened slightly with the 2-Year U.S. Treasury closing at 4.39%; the 5-Year at 4.20%; and the 30-Year unchanged at 4.45%.
Key economic releases next week include the July employment report, the FOMC interest-rate decision, and the ISM Manufacturing Index.
