Weekly Market Highlights
July 28, 2014
U.S. Equities and Interest Rates Continue to Move in Opposite Directions
- The Federal Open Market Committee (FOMC) is scheduled to hold its policy meeting on Tuesday and Wednesday
- Busy week of earnings and domestic economic releases on tap
Last Week's Highlights
- U.S. Consumer Price Index: +0.3% in June month-over-month and +2.1% year-over-year (core CPI increased 0.1% month-over-month and 1.9% year-over-year).
- U.S. Existing Home Sales: +2.6% to SAAR of 5.04 million units in June.
- U.S. New Home Sales: -8.1% to SAAR of 406,000 units in June.
- U.S. Durable Goods Orders: +0.7% in June (excluding transportation, durable goods orders increased 0.8%).
- Oil: $102.09 (▲$0.14)
- Gold: $1,303.30 (▼$6.10)
- U.S. 10-year Treasury: 2.47% (▼0.01%)
- Dollar: Euro--$1.34, Yen--101.83 (strengthened against Euro and Yen)
- VIX: 12.69 (▲0.63)
What to Watch for
- Tuesday 7/29: Case-Shiller Home Prices
- Tuesday 7/29: U.S. Consumer Confidence
- Tuesday 7/29-7/30: FOMC Meeting and Policy Decision
- Wednesday 7/30: 2Q 2014 U.S. GDP (first estimate)
- Friday 8/1: U.S. Employment Report
- Friday 8/1: U.S. Personal Income and Outlays
- Friday 8/1: ISM Manufacturing Index
Domestic financial markets experienced a familiar disconnect last week with the S&P 500 rising to a new all-time high and the U.S. 10-year Treasury yield falling back to its lowest level year to date. Although the S&P 500 has moved gradually higher since the beginning of February, declining interest rates in the first quarter coincided with lower-than-expected economic growth and inflation. More recently, Treasury yields are trading near their lows for the year even in the face of improving U.S. economic data and continued strong performance of risk assets. Foreign inflows into Treasuries and reduced Treasury issuance are providing support for low yields. As we have said previously, however, we would not become accustomed to the current yield environment as we anticipate interest rates gradually moving higher along with an improving labor market. In addition, the Federal Reserve will eventually communicate a change in policy as we near the end of its current asset purchase program, which may introduce further interest rate volatility in the near term.
The FOMC will be meeting on Tuesday and Wednesday but we anticipate very little in the way of news aside from another $10 billion taper, which will bring the Fed’s monthly asset purchases down to $25 billion per month. On its current trajectory, the Fed would wrap up its quantitative easing program in October, but has thus far remained committed to a June 2015 timeframe for raising rates. While recent economic data appears to be displaying an improved growth backdrop, we believe that the heightened geopolitical risks and the possibility of further economic sanctions on Russia are likely to keep Federal Reserve Chair Yellen and company in a wait-and-see mode. The September to December timeframe, in comparison, will be important to monitor for a change in Fed communication.
Economy and Earnings Intersect
This week will be a busy one on the earnings and economic data fronts. With respect to earnings, 144 S&P 500 companies, representing 25% of the index market capitalization, are scheduled to report their financial results—Energy, in particular, will be in focus with two-thirds of the sector reporting this week. Meanwhile, the U.S. employment report (consensus: +225K), ISM Manufacturing Index (consensus: 55.8) and first estimate for 2Q 2014 U.S. GDP (consensus: 2.9%) will headline this week’s economic releases. Despite the ongoing uncertainty in many parts of the world, domestic economic and business fundamentals appear headed in the right direction and we believe this week has the potential to illustrate that trend.
Data Source: FactSet and RIMES
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