Hello, I’m Greg Curvall, Senior Portfolio Manager with Fifth Third Bank.
After ending up higher on Friday, the S&P 500 was essentially unchanged for the week after regaining most of its losses since Monday’s sharp decline that was prompted by a weakening labor market and the unwinding of the yen carry trade. Both the S&P 500 and Nasdaq are still up about 12 percent on the year.
The pullback in equities began following the weaker-than-expected July employment report in the previous week. The report showed that the US economy, though still adding jobs on monthly basis, was doing so at a slower pace. The unemployment rate also rose higher, though much of the move was due to people entering the job market, rather than workers being laid off.
One of the biggest catalysts behind Monday’s mini-crash was the unwinding of the yen carry trade. This is a popular trade where market participants borrow money in a country with low interest rates, such as Japan, and invest in currencies with a higher interest rate, such as the U.S. dollar. At the very end of July, the Bank of Japan unexpectedly made moves that led to a strong appreciation in the value of the Yen, which led to a stunning 12 percent decline in Japanese stocks. The sharp devaluing of Japanese equities then bled into U.S. stocks.
Meanwhile, corporate earnings have been good enough. Companies in the S&P 500 have reported second-quarter results that are about 4 percent above expectations, in line with long-term averages. Many investors are impatiently waiting for the earnings report from chip-giant Nvidia, which will be released at the end of August. Nvidia has been one of the main drivers of the U.S. stock market over the last 12 months, and many investors consider it to be an appropriate bellwether for the rest of the market.
The weak jobs report led investors to reevaluate their expectations for Fed policy. Two weeks ago, most investors were predicting two quarter-point rate cuts from the Fed in the remaining months of this year. Last week changed expectations. Interest rate futures now signal a 70 percent chance that the Fed will cut rates by 50 basis points at its next meeting in September. And the futures show an 85 percent probability that rates will be cut by at least 100 basis points combined before year-end.
The economic calendar is as jam-packed as it gets this week. On Tuesday, we get the Producer’s Price Index, or PPI. On Wednesday, we get the Consumer Price Index, or CPI, a popular gauge of inflation. On Thursday, we get Retail Sales. Then we finish up the week with Housing Starts, Building Permits and the University of Michigan Sentiment number.
As always, we will be watching and reporting back to you next week. Thank you.
