We have an interesting two months approaching the markets where I have been calling for some weakness to come through with price action and judging by our price action this past Friday it clearly has shown itself. This is a time where I believe many large money firms will be looking at “buying the dip” but the key is “when?”…get my take on the current markets in this week’s round-up.
WEEKLY SOUND BITES:
US indexes started August with a down week after closing out a strong July. Stocks declined amid rising Treasury yields and an unexpected downgrade to the U.S. government’s credit rating. Fitch Ratings on Tuesday downgraded the credit rating of U.S. government debt from the highest level, AAA, to AA+, with the ratings agency saying its decision “reflects governance and medium-term fiscal challenges.” S&P also has a AA+ rating on the U.S., following a downgrade in 2011. Rushing in to buy the S&P after it has had its best first seven month of the year since 1997 seems a bit hard pill to swallow for many big month firm.
The Labor Department’s closely watched monthly nonfarm payroll report showed that employers added 187,000 jobs in July, about the same as June’s downwardly revised 185,000. The past two months’ data, while still showing health in the labor market, point to a notable slowing from the first five months of the year when the economy added an average of 287,000 jobs a month. The unemployment rate ticked down to 3.5% from 3.6% the prior month, while wages grew 4.4% over the 12-month period, unchanged from June.
The yield on the benchmark 10-year U.S. Treasury note increased from 3.95% at the end of the previous week to almost 4.20% by early Friday but decreased to about 4.05% following the release of the jobs report. Expectations for higher levels of issuance by the Treasury Department seemed to help push yields higher.
Over in Europe we see that the BoE raised its key interest rate by a quarter of a percentage point to a 15-year high of 5.25%. It warned that rates were likely to stay high for some time. The central bank predicted the inflation rate would fall to 4.9% by the end of this year, a faster pace than in its May forecast. BoE estimates for economic growth were little changed at 0.5% this year and next. Meanwhile, in the Euro Zone, annual inflation slowed further to 5.3% in July from 5.5% in June but remained well above the European Central Bank’s 2% target. The eurozone economy expanded 0.3% sequentially in the second quarter, after GDP shrank or stagnated in the previous two quarters.
With global investor risk appetite dampened by a U.S. sovereign credit rating downgrade, Japan’s stock markets fell over the week. And the yield on the 10-year Japanese government bond (JGB) rose to 0.65%, around a nine-year high, from 0.55% at the end of the previous week. This followed the Bank of Japan’s (BoJ’s) July monetary policy tweak to effectively allow interest rates to rise more freely, by increasing the flexibility around its yield curve control target. Meanwhile, Japan’s services sector expansion slowed in July, according to the latest PMI data with the headline services index falling to 53.8 in July, from 54.0 in June. IN addition, the manufacturing PMI slipped further into contraction territory, to 49.6 in July from 49.8 the prior month. Both output and new orders fell modestly, due primarily to weak demand for manufactured goods in both domestic and international markets.
Chinese stocks rose as Beijing’s supportive stance offset concerns about the latest batch of disappointing economic data. China’s official manufacturing Purchasing Managers’ Index (PMI) rose to 49.3 in July as expected, from June’s 49. However, it stayed below the 50-point threshold separating growth from contraction for the fourth consecutive month. The nonmanufacturing PMI declined to a weaker-than-expected 51.5 from 53.2 in June.
Enjoy this week’s round-up;
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