July 1 – July 5 Week in Review
The stock market had a busy holiday shortened week last week, which produced solid results for investors. The S&P 500 index gained 1.7%, while the Dow Jones Industrial Average rose 1.2%, and the Nasdaq Composite climbed 1.9%. All three narrowly missed finishing the week at record highs. The Russel 2000 Index finished up 1.9%, but remains well below its August 2018 high.
Stocks surged to begin the week, but the strong opening gave way to a daylong retreat from opening highs. Monday's session featured the response to last Saturday's meeting between President Trump and China's President Xi Jinping. While the meeting did not yield concrete steps toward reaching a trade deal, it also did not lead to an escalation of the dispute which encouraged investors.
Chipmakers served as a good example of this dynamic, as the Philadelphia Semiconductor Index was up 5.0% at the start of the session but narrowed its gain to 2.7% by the close. The Index continued retreating over the next three sessions to end the week with a gain of just 0.2%.
The initial euphoria about the lack of negative developments on the trade front faded once the market received more weak economic data from Asia and Europe. China's Manufacturing PMI remained in contraction territory in the final June reading, Japan's Manufacturing PMI decreased to 49.3 from 49.5, and South Korea reported that its exports decreased 13.5% year over year in June. Over in Europe the Manufacturing PMI for the Eurozone slipped to 47.6 from 47.8, and Germany's Factory Orders fell 2.2% month over month in May.
Weak economic data from around the globe increased investor expectations for more easing from global central banks, and those expectations were further boosted by the news that IMF Managing Director Christine Lagarde was nominated to take over for Mario Draghi at the European Central Bank. Ms. Lagarde is not an economist, but she is expected to be very dovish, considering the IMF has been a vocal supporter of negative interest rates during her tenure at the fund.
Manufacturing data from the U.S. also pointed to a slowdown in activity, but the sector remains in expansion, according to the latest Manufacturing Survey from the ISM. In addition, Friday's release of the Employment Situation report showed a healthy increase in June nonfarm payrolls although the unemployment rate rose slightly to 3.7%.
Friday's reminder about continued growth in nonfarm payrolls reduced expectations for an aggressive rate cut at the next Fed meeting, which in turn pressured stocks and Treasuries from their best levels of the year. The benchmark 10 year U.S. Treasury note closed Friday at 2.037% after dropping to as low as 1.942% during the week. At the end of the week, the fed funds futures market saw just a 4.9% implied likelihood of a 50-basis point cut in July, down from 32.3% one week ago. The implied probability of a 25 basis point cut remained at 100.0%.
In other markets the U.S. dollar index closed at 97.23 and WTI crude closed $57.73 a barrel.
July 8 – July 12 Economic Calendar