Nasdaq reverses course as bond yields rise

Sentiment is fickle. Nasdaq saw a more than two point swing from green to red today, now down 0.5% at time of writing. Bonds fell sharply as they digested the Fed’s rate rise and outlook, with 10 year yields rising a whopping 20 basis points. A market rally built on ratings expansion can’t always be trusted, as we’ve noted (Is the Surge in Stocks’ P/Es Justified?). If, as seems likely, earnings growth slows and the discount interest rate rises, equity markets could see a correction, with the tech-heavy Nasdaq and AI concept stocks suffering worse.

Bottom-line: Risk-off.

TODAY’S MAJOR NEWS

Fed leaves another rate hike on the table, markets ignore the risk

Wall Street remains convinced that we can have a soft landing with the Federal Reserve not reducing rates until next year, and few if any surprises in the 25 basis points hike. The Fed left the door open for another rate rise later this year, while speaking of moderate economic growth; its policy will continue to be driven by data, with a plethora of data points scheduled to be released prior to its next meeting eight weeks from now. Strong Q2 GDP data and no increase in claims for unemployment suggests that wage inflation will not be slowing significantly in the near-term, creating more challenges for the Federal Reserve’s attempts to bring inflation down to its 2% mandate. Fed fund futures reflect between 20% and 30% odds of another rate hike this year, which might be a touch optimistic and open the door to shocks.

Stronger Q2 US GDP, economy not slowing

• The first reading of second quarter gross domestic product came in stronger than expected at 2.4% annualized growth, above the anticipated 1.5%, and up from 2.0% in the previous quarter
• Personal consumption expenditures rose by 1.6%, above the anticipated 1.5%, down from 4.2% growth the previous quarter
• Durable goods orders grew at a robust 4.7% pace month-on-month in June, significantly above the anticipated 0.5%, and beating an upwardly revised 2.0% in the previous month
• Durable goods orders minus transportation grew 0.6% month-on-month, above the anticipated unchanged rate, and slightly below an upwardly revised 0.7% growth in the previous month
• Core capital goods orders, an indicator of business optimism, grew at a 0.2% month-on-month pace in June, above the anticipated unchanged rate, and down from a downwardly revised 0.5% pace in the previous month

Unemployment claims fell, labor market still tight

• First-time claims for unemployment benefits fell to 221,00 in the week ending July 22, above the anticipated 235,000 number, and down from 228,00 the previous week
• The four-week moving average fell to 233,750 claims, down from 237,500 the previous week – with no signs that the labor market is flagging
• Continuing claims for the week ending July 15 fell a sharp 59,00 to 1.690 million – reflecting a further tightening of the jobs market

Home sales edge up in June

• Traffic is gradually returning to the housing market as consumer sentiment improves
• Homeowners have little incentive to sell if they're going to have to buy a replacement home at a mortgage rate of 7-8%
• The pending home sales index rose 0.3% month-on-month in June to 76.8, matching analyst expectations, and a dramatic improvement from the 2.5% decline posted in May
• The supply of existing homes for sale remains very low, perhaps unsurprising with 75% of in force home loans having an interest rate at 4% or lower

Russia puts the squeeze on Ukraine grain exports

• Russia sent two missiles into Ukraine’s Odessa port facilities overnight, inflicting more damage
• Missiles were reportedly fired from a submarine in the Black Sea, flying at low altitude
• Russia is expected to continue its strikes on Ukraine infrastructure, preventing it from exporting longer-term
• At least five ships and 26 objects of port infrastructure have been damaged the past nine days

TODAY’S MAJOR MARKETS

Equity markets

• Markets reversed course in early trading, as it became evident that bonds were selling off, with the Russell 2000, S&P 500 and Nasdaq were off by 1.4%, 0.6% and 0.6% respectively, at the time of writing
• Global markets were up, but only because most closed before the Street sold off, with the with the DAX, Nikkei 225, and FTSE ended up by 1.7%, 0.7% and 0.2% respectively
• The VIX, Wall Street’s fear index, saw its sharpest increase in months to 14.7, indicating rising caution

Currencies and Bonds

• The dollar index rose 0.9% against a basket of currencies, at 101.8, as traders looked to buy US bonds
• Sterling, Euro, and Yen dollar cross rates were off by 1.2%, 1.1% and 0.7% respectively, at the time of writing
• Bonds were a big story today, with yields on 2- and 10-year Treasuries up to 4.92% and 4.01% respectively

Commodities

• Crude oil prices rallied again, up 1.4%, continuing a recent uptrend to $79.9 per barrel
• Silver fell 2.9% to $24.3 per ounce, while gold fell 1.3% at $1,944 per ounce
• Grain and oilseed sector found strength in another Russian attack on Ukraine’s export infrastructure overnight.

Analysis by Arlan Suderman, Chief Commodities Economist: [email protected]

Market outlook by Paul Walton, Financial Writer: [email protected]