The U.S. stock market finished the week substantially lower as the Fed’s rate cut and escalation of the U.S. and China trade war weighs on investor sentiment. Given the Fed rate cut, interest rates followed suit as the 10-year treasury yield dropped from 2.08% last week to 1.85% today. Meanwhile the spread between the 10-year treasury yield and the 2-year treasury yield narrowed from 0.25% to 0.17%. Also, as a result of the Fed’s decision to cut rates, the price of gold jumped 2.4% to $1,452 an ounce, and the U.S. dollar index (DXY) rose from 97.99 to 98.10. After a volatile week, the price of crude oil ended down 1.78% to $55.19 a barrel as Trump’s additional tariffs on Chinese imports outweighed a drop in OPEC’s oil production.
This Week's Economic Highlights
- Personal income rose by 0.4% in June, marking its fifth consecutive monthly rise. Meanwhile, consumer spending rose by 0.3%, marking its third consecutive monthly rise. It should be noted that consumer spending accounts for nearly 70% of the U.S.’s economic activity.
- The personal consumption expenditures (PCE) price index, a measure of inflation, rose by 0.1% in the month of June. Over the past year PCE rose by 1.4%, which is well below the Federal Reserve’s 2.0% target. Core PCE, which excludes the volatile food and energy prices, rose by 1.6% in June and 1.6% over the past year.
- The Federal Reserve Open Market Committee (FOMC) announced its first rate cut since 2008, as they drop the target range from 2.25-2.50% to 2.00-2.25%. FOMC chairman Jerome Powell, described the rate cut as a “mid-cycle adjustment” and does not see the rate cut as a “beginning of a lengthy cutting cycle”.
- Initial unemployment claims rose by 8,000 to 215,000 for the week ending July 27th. However, the less volatile four-week average of initial claims fell by 1,750 to 211,500. Continuing unemployment claims, which lag initial claims by a week, rose by 22.000 to 1.69 million.
- The ISM Manufacturing Index was little changed as it dropped from 51.7% in May to 51.2% in June. Even though a reading greater than 50% indicates manufacturing companies expanding, this is the lowest reading the index has recognized in three years.
- The U.S. added 164,000 new jobs in July, keeping the unemployment rate at a near all-time low of 3.7%. Wage growth also remains strong as its 12-month rate edges up from 3.1% to 3.2% with the average worker earning $27.98 an hour.
“What we want:
1+1+1+1+1+1+1 = 7
What the market delivers:
1+2+4-3-2+0+5 = 7”
– D. Muthukrishnan
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