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S&P 500 back to November 2020 levels
Stocks were down for a 3rd week in a row on the back of turmoil in UK financial markets and signs that the Fed still has much more to tighten. In Fixed income, the 10-year U.S. Treasury note briefly breached 4% for the first time since 2008. The S&P 500 Index broke below its mid-June lows and fell back to November 2020 levels. The market’s biggest moves came Wednesday, following a surprise decision by the Bank of England to purchase long-dated UK government bonds. The end result was an easing of recent upward pressure on interest rates and the U.S. dollar and a rally for stocks. Markets reversed their gains on Thursday, however, with the selling seemingly caused by data showing continued resilience in the economy and inflationary pressures. Weekly jobless claims fell to 193,000, well below consensus expectations and their lowest level since late April. Meanwhile, the core PCE price index, widely recognized as the Fed’s preferred inflation gauge, rose at an annualized pace of 4.7% in the second quarter—well above expectations of around 4.4% as well as the Fed’s long-term 2.0% inflation target. In Europe, ields jumped at the start of the week amid worries about a severe deterioration in the public finances and then eased after the BoE said it would make temporary purchases of long-dated bonds “on whatever scale is necessary” in an effort to “restore orderly market conditions.” Shares in Europe fell slightly amid disappointing corporate earnings and fears of recession.
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Stocks recorded broad losses, as concerns over tensions in the Middle East and the possibility of U.S. interest rates remaining “higher for longer” appeared to weigh on sentiment. Mega-cap technology shares lagged as rising rates placed a higher theoretical discount on future earnings. A Q1 revenue miss from ASML Holdings also seemed to weigh on the sector and on general optimism toward companies with AI-related earnings. Some strong economic data (e.g retail sales +0.7% vs. 0.3% expected) appeared to increase worries that the Fed would push back any interest rate cuts to the fall, if not to 2025. Conversely, downward surprises in housing market data may have furthered inflation fears by auguring continued supply tightness. As was the case last week, Fed officials expressed their concern with recent economic data.