Weekly Market Recap
Markets traded cautiously this week, with the S&P 500 trapped in a narrow trading range since the beginning of July. Nasdaq, technology stocks, and the growth factor outperformed, while value, low volatility, and equal-weighted sectors lagged. Small-cap stocks slightly underperformed the broader S&P 500 index. Internationally, emerging markets notably outperformed both developed markets and U.S. indices.
In fixed income, rising Treasury yields pressured long-duration bonds as the 30-year yield rose sharply. Short-duration bonds remained stable. Investment-grade corporate bonds lagged due to their longer durations, whereas high-yield corporate bonds ended flat despite modest spread widening. Commodities saw mixed results: gold prices remained steady, oil traded higher, Bitcoin reached an all-time high earlier in the week, and the U.S. dollar strengthened.
Key Takeaways
1. Tariff Impact Evident in Inflation Data
Headline CPI increased by +0.3% in June, driving the annual inflation rate to +2.7%, its fastest pace since January. Tariff-affected goods like sporting goods (+1.4%), household furnishings (+1.0%), and apparel (+0.4%) notably contributed. Core CPI rose more modestly by +0.2%, helped by a slowdown in shelter costs. Producer prices (PPI) were flat, below expectations, indicating limited inflationary pressures beyond tariff-driven increases.
Implication: Inflation progress has slowed without reaccelerating significantly, largely influenced by tariff-driven price increases. This environment likely keeps the Fed from initiating rate cuts in July.
2. Industrial Production Shows Modest Recovery
Industrial production rose +0.3% in June, ending two flat months. A surge in utilities output (+2.8%) due to a heat wave drove the increase, offsetting continued weakness in mining (-0.3%) and sluggish manufacturing (+0.1%), particularly impacted by falling auto production (-2.6%). Industrial growth slowed notably in Q2 (+1.1% annualized) compared to Q1’s +4.3%.
Implication: June’s industrial rebound was narrow and weather-dependent, signaling a fading momentum rather than robust economic strength.
3. Retail Sales Rebound
Retail sales grew by +0.6% in June after May’s sharp decline (-0.9%). Autos (+1.2%), clothing (+0.9%), and building materials (+0.9%) led gains, with solid support from food services and e-commerce. Home furnishings, electronics, and furniture slightly declined (-0.1%). Control-group retail sales, crucial for GDP, rose by +0.5%, though overall consumer spending growth continues to gradually moderate.
Implication: June’s retail sales alleviate immediate concerns about a consumer spending downturn, suggesting resilience despite ongoing economic uncertainties.
4. Economic Cooling Unlikely to Prompt Immediate Rate Cuts
June’s data indicates gradual economic cooling without immediate recession risks. Although labor market, consumer spending, and industrial production growth slowed, overall momentum remains positive. Emerging tariff-driven inflation pressures complicate Fed policy choices.
Implication: The Fed is likely to hold steady in July, maintaining a cautious stance. Rate cuts later this year hinge on obvious economic deterioration or significant inflation progress, with political factors raising the bar for immediate action.
5. Markets Calm Despite Continued Trade Uncertainty
Trade policy uncertainty remains elevated, yet implied volatility metrics for stocks, bonds, gold, and currencies have steadily declined, suggesting investors anticipate stable market conditions in the near term despite unresolved trade issues.
Implication: Current market tranquility amid ongoing trade tensions may be fragile. Renewed escalation in trade conflicts could quickly disrupt investor complacency.
Looking Ahead
Continue monitoring inflation and trade policy developments closely. Market complacency could swiftly reverse if trade tensions intensify or inflation pressures accelerate beyond current expectations. Remain vigilant and prepared for potential shifts in sentiment.
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