RECAPPING LAST WEEK

U.S. equity indices continued their push into record-high territory in a shortened trading week. U.S. Treasury yields rose after a better-then-expected employment report while investors kept an eye on trade negotiations and the final hurdles for the massive tax and spending bill. The S&P500 and Nasdaq Composite indices gained more than 1.5% and the Russell 2000 jumped 3.4%. All S&P500 sectors finished positive, led by a 4% surge in basic materials. Technology rose 2.5% after the U.S. government rescinded export restrictions on chip-design software to China. The sector was also boosted by the inclusion of tax credits within the latest version of the spending bill, designed to encourage semiconductor companies to build plants domestically.

Crude oil prices added nearly 3% after Iran suspended cooperation with the United Nations’ nuclear watchdog group. In economic news, U.S. non-farm payrolls increased by 147,000 in June with the unemployment rate unexpectedly falling to 4.1%. The solid report all but ruled out a rate cut later this month, although June’s inflation data could yet influence that decision. At a central bank gathering in Europe, Federal Reserve Chair Powell reiterated plans to “wait and learn more” before lowering rates, noting that monetary policy easing would likely have already occurred were it not for higher inflation forecasts caused by tariffs. U.S. manufacturing remained subdued last month while prices paid for inputs inched higher. The ISM services PMI returned to expansion territory, but the employment index cooled in both sectors.

Despite the better-than-forecast government jobs report, there were other signs of labor market slowing: hiring remained tepid and private payrolls fell in June. Overseas, UK government bond prices fell by the largest amount in nearly three years after plans to cut welfare benefits were scrapped. Investors fear that finance minister Reeves—who has emphasized her commitment to fiscal rules—may end up in an untenable position and that Britain may turn to excessive unfunded borrowing to plug deficits. In Europe, June’s consumer inflation was in-line with expectations at +2.0% YoY, brightening prospects for one more rate cut this year. Finally, China’s manufacturing activity fell for a third straight month, but the pace of decline slowed as new orders picked up. The private Caixin PMI— which focuses on smaller, export-oriented firms—showed even better results, suggesting that the government’s policy support may be taking effect.

THE WEEK AHEAD

With the White House’s tax and spending bill having finally been signed into law, attention turns to trade negotiations. While many details remain unclear regarding the new U.S. trade deal with Vietnam, it may be a wake-up call for other countries, even as this week’s July 9 deadline to end the 90-day tariff freeze may be extended to August 1. Late last week, European Union negotiators said they may look for an extension to avoid duty hikes as trade talks with the U.S. have stalled. The U.S. economic calendar is light this week, highlighted by Wednesday’s release of the minutes from June’s FOMC meeting.

Bond investors will be watching the results from 10- and 30-year Treasury auctions. Small business sentiment and consumer credit round out the domestic agenda. The OPEC+ meeting over the weekend delivered another 548,000 barrel-a-day increase for August, the fourth consecutive month of significant oil production hikes. Australia’s central bank meets later tonight and is widely expected to deliver a 25-basis point cut as the country’s retail sales and housing data have softened. The European docket features German industrial production, EU retail sales and investor sentiment, and the monthly UK GDP update.
Last of all, China has a busy week that include trade balance numbers, inflation figures, and new loans for the month of June.

Source: Schwab