Market Digest – Week Ending 7/31
Domestic and foreign developed stocks regained some ground following dismal returns in the previous week. However, Emerging Market equities ended slightly lower as they were unable to fully recover from Monday’s steep slide in China. Commodities also sold off with Brent crude hitting its lowest price since January. Domestic and foreign bonds both increased, while the dollar was unchanged versus the euro.
S&P 500: 2,104 (+1.2%)
FTSE All-World ex-US: (+1.2%)
US 10 Year Treasury Yield: 2.19% (-0.07%)
Gold: $1,094 (-0.4%)
USD/EUR: $1.098 (+0.0%)
• Monday – Stocks in China fell 8.5% as investors became skeptical of the government’s ability to stem the market decline.
• Wednesday – The US Federal Reserve left its benchmark rate unchanged, but continued gains in employment make a near term rate hike possible.
• Wednesday – The Afghan government confirmed Taliban leader Mullah Mohammad Omar died in April 2013, but the cause is still unknown.
• Thursday – US second quarter GDP grew at a 2.3% annual pace, below consensus estimates. First quarter GDP was revised upward to 0.6% growth, compared to a previous estimate of a 0.2% contraction.
• Friday – Uber concluded a round of funding valuing the company at $51 billion.
• Friday – Beijing was chosen to host the 2022 winter Olympics.
All eyes were on the US economy with an updated Fed statement and the release of second quarter GDP figures. On Wednesday, very much in line with expectations, the Fed left its benchmark rate unchanged. Investors instead looked for clues on the timing of future rate hikes. Consistent with previous statements, the Fed says it expects an increase if employment continues to improve and inflation moves back towards target levels. We’ve already seen steady gains in the labor market, but persistently low inflation has more or less stayed the Fed’s hand up until this point. Thursday’s GDP report, however, provided a bit more support for a hike.
The US economy grew at a 2.3% seasonally adjusted rate in the second quarter, slightly below consensus expectations. Sluggish business investment continued to weigh on growth, while strong job gains, housing, consumption and consumer spending drove improvements over the weak first quarter. Perhaps the most interesting development was inflation, which grew at a 2.2% pace, or 1.8% excluding food and energy. While year over year figures are still relatively low, this represents a modest acceleration from the previous two quarters.
So barring any deterioration in economic conditions, stronger employment and firmer inflation make it increasingly likely the Fed will raise rates later this year. But it’s important to put this in perspective: any increase will be small. More importantly, rates should remain low and very accommodative for the foreseeable future.