Hello, this is Tom Jalics, Chief Market Strategist at Fifth Third Bank
U.S. equity markets ended Friday’s session mixed, after a stronger-than-expected jobs report raised the prospect of more aggressive tightening by the Federal Reserve. Despite this, US equities were mostly higher last week, following on the previous week’s strong gains. For the week, the Dow Jones Industrial Average declined by 0.1%, the S&P 500 increased by 0.4%, and the Nasdaq Composite ended the week 2.2% higher. Bond prices declined last week, with the yield on the 10-year U.S. Treasury note increasing to 2.82%, up 17 basis points for the week, as demand for safe-haven assets abated. The yield curve remained inverted, with the yield on the two-year U.S. Treasury note at 3.24% exceeding that of the 10-year note. The 2 year/10 year note negative spread set a new 20 year low. The price of West Texas Intermediate (WTI) crude fell to $88.41 per barrel on Friday, down 9.7% for the week, the lowest since February, on weaker demand concerns outweighing ongoing geopolitical uncertainties. U.S. inventories unexpectedly rose, while the Organization of Petroleum Exporting Countries (OPEC) and its allies agreed to raise its production output by 100,000 barrels per day. The dollar was stronger across the board with the U.S. Dollar Index up 0.8%. Gold was higher, rising 0.5% in its third consecutive week of gains, following five straight weeks lower.
Per usual, the path of Federal Reserve interest rate increases was on investors’ minds last week. Multiple Fed speakers pushed back on the idea of a Fed dovish policy pivot ahead. San Francisco Fed's Daly said the Fed's fight against inflation was "nowhere near almost done". Cleveland Fed’s Mester said she is still waiting on compelling evidence that inflation is moderating, and Minneapolis Fed’s Kashkari argued the market is getting ahead of itself. By week's end, market expectations were for a September rate-hike forecast of 0.75% (up from 0.50% in the previous week) and pushed out expectations for a rate cut into July 2023 (from Spring 2023). The major reason for this shift was last Friday's unexpectedly strong nonfarm payrolls release. Over 528,000 jobs were created in July, faster than June's upwardly revised 398,000 jobs number and topping expectations for a slowdown to 250,000 job gains. Despite the recent announcements of layoffs and hiring slowdowns from corporate America, employment (and the unemployment rate) returned to pre-pandemic levels for the month. Additionally, average hourly earnings were up 0.5% month over month, hotter than expectations for 0.3%, which was also the pace in June.
Financial markets digested many earnings reports last week. With 87% of S&P 500 constituents having reported, the blended earnings growth rate now sits at 6.7% for the second quarter, better than the 4.0% expected at the end of the first quarter. While fewer companies are reporting earnings beats than longer-term averages, revenue beats have been better than expected. Nevertheless, analysts continue to voice concerns about earnings cuts moving forward against a more challenging growth backdrop.
In the week ahead, investors can expect a more subdued week of corporate earnings reports. Second quarter earnings season winds down with only 23 S&P 500 reporters on the calendar. Companies set to report include AIG, Sysco, Wynn Resorts, Norwegian Cruise Lines, Disney, and Fox Corporation, among others. On Wednesday, the latest Consumer Price Index (CPI) reading will provide an important update on the rate of consumer inflation. The Producer Price Index (PPI) will follow on Thursday. On Friday, market watchers can expect the preliminary August reading of the Michigan Consumer Sentiment Index.
As always, we will be watching and reporting to you next week.Thank you.
