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The Long and Short of it, week ending 07 July 2023

Posted: 11 July, 2023

Topic: Telecoms , Financials , Basic Materials , Energy , Industrials , Technology

Publication Type: Market Commentaries

The Long and Short of it, week ending 07 July 2023

All 3 major stock indexes fell last week with the Dow Jones Industrial Average falling the most, followed by the S&P 500 Index and then by the NASDAQ Composite Index. Surprisingly, – given the over 20bps increase in the 10-year Treasury rate - the NASDAQ Composite Index outperformed the other two. The July 4th holiday-shortened week saw markets increase only Monday, moving higher on much better-than-expected TSLA sales and Rivian deliveries and on a weaker-than-expected ISM Mfg Index release. Markets moved lower the remainder of the week, reacting to a myriad of factors including hawkish FOMC minutes (released Wednesday), a stronger-than-expected ISM Services Index Thursday and a jobs report (released Friday) showing continued significant upward wage pressures and a drop in the unemployment rate (both negating a smaller-than-expected increase in payrolls) All of these factors increased market expectations of additional Fed rate hikes and, at the same time, lowered expectations of a Fed pivot in the near future. Reflecting these expectations, the 10-year Treasury rate rose 23bps with 21bps of that increase coming from higher 10-year real rates. Interestingly, the U.S. dollar weakened over the week, likely reflecting expectations of even tighter BoE and ECB monetary policy. For the week, the S&P 500 Index decreased 1.1% to 4,399.63, the Nasdaq Composite Index fell 0.9% to 13,660.72, the Dow Jones Industrial Average dropped 2.0% to 33,705.01, the 10-year U.S. Treasury rate increased 23bps to 4.07% and the U.S. dollar (as measured by the ICE U.S. Dollar index – DXY) weakened 0.6%.

European stock indexes moved lower as well last week, markedly underperforming U.S. stock indexes. The STOXX 600 and FTSE 100 Indexes moved lower each day last week, pressured by slowing euro zone and UK factory and services activity compounded by growing expectations of higher rates as a result of ECB and BoE adamantly hawkish comments. Both the STOXX 600 and FTSE 100 Indexes fell sharply Thursday (over 2%) apparently reacting to a much stronger-than-expected ADP payroll report. The report, in front of Friday’s U.S. jobs report, combined with Wednesday’s hawkish FOMC minutes, greatly added to fears of higher U.S. rates increasing expectations of slower growth going forward. Much weaker-than-expected Chinese services activity also helped move prices lower while a stronger British pound added to the FTSE 100 Index’s malaise. As in the U.S., 10-year government rates moved significantly higher, rising on expectations of continued ECB and BoE rate hikes. For the week, the STOXX 600 Index fell 3.0% to 447.64, the FTSE 100 Index dropped 3.6% to 7,256.94, the 10-year Gilt rate increased 26bps to 4.65%, the 10-year Bund rate increased 25bps to 2.64% and the British pound and euro appreciated 1.0% and 0.5%, respectively, both with respect to the U.S. dollar.