The stock market registered gains with a busy week full of earnings, economic, and central bank news. The resilience of the US economy, the anticipation of the Fed nearing its rate-hike journey, and expected earnings growth in the second half of the year continue to impress market participants.

FOMC and ECB Rate Hikes

On Wednesday, the FOMC unanimously decided to raise the target range for the fed funds rate by 25 basis points to 5.25-5.50%. Interestingly, this shift didn’t significantly impact expectations for a second rate hike before the year’s end.

The ECB mirrored the FOMC, with a 25 basis point increase in its three key lending rates, sparking speculation that it too may soon cease rate hikes.

Bank of Japan’s Surprise Move

The Bank of Japan, meanwhile, held steady on interest rates but shocked the market by adjusting its yield curve control policy. They maintain the target rate at 0.5%, offering to purchase 10-yr JGBs at 1.0% through fixed-rate purchase operations every business day.

Tech Stocks: The Week’s High Flyers

Although the stock market forecast remains mildly bullish for the next six months, tech stocks and consumer growth companies have experienced significant gains, enticing investors and elevating optimism.

Consider the following:

• Tesla led the S&P 500 Index with a significant 6.9% surge due to record quarterly sales.
• Activision shares greatly jumped after Microsoft’s $75 billion purchase approval.
• Despite a slight decline towards the week’s end, the Nasdaq Composite recorded its highest level since April 2022 in intraday trading.

These tech giants’ stellar performances had a notable impact on their respective indexes, providing investors with a substantial return on investment. But the question persists: will this momentum carry into the coming weeks?

Home Sales Fall

U.S. new single-family home sales fell 2.5% to an annual rate of 697,000 units in June, after three consecutive months of increases. Demand remains strong due to a shortage of existing homes, pushing potential buyers towards new houses. This trend is driving up homebuilding and house prices. However, higher interest rates could delay market recovery.

Broader Market Developments

• The Vanguard Mega Cap Growth ETF (MGK) rose 2.0% as the mega-cap space spearheaded the week’s gains.
• The S&P 500 communication services sector surged 6.9%, reflecting solid performances from Meta Platforms and Alphabet.
• The materials (+1.8%) and energy (+1.7%) sectors were top performers.
• On the downside, the utilities (-2.1%) and real estate (-1.8%) sectors registered the most significant declines.

Economic Reports Validate Soft Landing View

This week’s economic report series continues to validate the soft landing/no landing view. Notably, consumer confidence was significantly increased, driven by a pickup in views about current conditions and the outlook. We also saw another low level of weekly initial jobless claims and a stronger-than-expected 2.4% increase in Q2 GDP.

Beware of Overoptimism

It’s important not to overlook the potential risks. Could our rose-tinted view be masking looming clouds?

While the US Treasury bond prices fell due to a rise in the Fed funds rate, sectors sensitive to interest rates, like the banking industry, might see a negative turn. As Marko Kolanovic from JPMorgan warns, the long-term effects of climate change could pose a significant risk to industries like cocoa production, despite its recent surge.

In conclusion, the market demonstrated a continued broadening of buying interest, with robust earnings-related gains from influential blue-chip names underpinning index performance.

CALENDAR & MOVERS

• Tuesday, August 1 – JOLTs Job Openings (June)
• Thursday, August 3 – Services PMI (July)
• Earnings

Upcoming Earnings

As earnings season progresses, tech giants Apple (AAPL) and Amazon (AMZN) are on deck to release their earnings after the markets close this Thursday. Although both firms are predicted to outperform estimates, certain investors are anxious that lackluster results could instigate a decline in the tech stocks rally seen this year. Nevertheless, last week, upbeat predictions from Meta Platforms (META) and impressive outcomes from Alphabet (GOOGL), Google’s parent company, have bolstered the confidence of those arguing that these tech behemoths’ hefty valuations are warranted.

Bank of England

The Bank of England (“BOE”) has its upcoming rate-setting meeting scheduled for Thursday. Opinions differ among market observers on whether the central bank will revert to a 25-basis point rate hike following June’s 50-bps increase. Despite signs of cooling price pressures, inflation stayed at 7.9% in June – strikingly the highest among leading economies and significantly surpassing the BOE’s 2% target. Accusations of the BOE lagging in its response as inflation continually exceeds expectations, despite 13 successive rate hikes since December 2021, have led to worries about a potential economic downturn.

Euro & China Econ Reports

In the forthcoming week, investors will pay close attention to the preliminary estimates for July inflation and Q2 GDP from the Eurozone. This data could influence the discourse on whether the European Central Bank should proceed with another rate hike in September. Eurozone inflation is currently surpassing the ECB’s target, while GDP figures are predicted to indicate a rebound in growth. Simultaneously, in China, upcoming PMI figures might suggest an ongoing contraction in the manufacturing sector, underscoring the necessity for fiscal stimuli to boost the post-pandemic recovery in the world’s second-largest economy. However, due to increasing apprehensions about debt risks, policymakers are likely to refrain from drastic stimulus actions.

BONDS

Last week, the bond market saw investors evaluating the impact of higher interest rates on economic growth after the Federal Reserve hinted at further rate hikes and raised the benchmark interest rate to combat inflation. Positive returns were observed in various sectors like investment-grade and high-yield corporates, while Treasuries saw negative returns due to rising rates. The Federal Reserve increased interest rates for the 11th time since March 2022. Investors are considering longer-dated maturities due to their durable yields.

COMMODITIES

Oil & Energy

For five weeks in a row, oil prices have seen a steady increase, with North Sea Brent and West Texas Intermediate (WTI) trading at roughly $83 and $79.60 per barrel, respectively. The renewed optimism towards the Federal Reserve from traders, anticipating an end to monetary tightening, has bolstered these figures. Robust US economic data signals the economy’s durability, reducing fears of a downturn and positively affecting oil demand. Meanwhile, the global financial community keeps a watchful eye on China’s pledge to boost its economy, as it is a significant contributor to global oil demand, accounting for over half of its growth. These collective factors paint an optimistic picture of the future of oil prices.

Precious Metals & Gold

This week, the prices of metals saw a modest incline overall, indicating that China’s economic promises are not a major concern for the market. Specifically, copper is trading at approximately $8580 per tonne on the London Metal Exchange (LME), while zinc is at $2480 per tonne. Gold experienced a volatile week as it responded to a weakening dollar and rising bond yields. Presently, gold’s trading value hovers around $1955.

CRYPTOCURRENCY

The past week in the cryptocurrency market was filled with events. US-based Bitcoin ATM operator, Bitcoin Depot, celebrated its NASDAQ listing via a business combination with GSR II Meteora Acquisition Corp, marking a significant milestone. Legislation known as the Lummis-Gillibrand Responsible Financial Innovation Act was proposed to establish a regulatory framework for digital assets. The cryptocurrency market capitalized on favorable macroeconomic conditions and cooled inflation data, with the market capitalization reaching $1.19 trillion. However, Binance, the largest crypto exchange, faced challenges, laying off over 1,000 employees amid federal investigations and regulatory crackdowns globally. The market witnessed both advancements and difficulties as it continues to evolve in various regulatory environments.