Baker Market Update
2024-07-19

It has been a resoundingly volatile week in markets. Monday’s reaction to the shocking assassination attempt of former U.S. president Donald Trump over the weekend had traders shifting positions across the financial system. The yield curve steepened on Monday as traders bet on a greater likelihood of tax cut extensions and higher trade tariffs which they associate with higher inflation and higher interest rates. The 2-to-30-year measure of the Treasury yield curve nudged into positive territory for the first time since January and the inversion from 2s to 10s also squeezed to its narrowest point since January. Stock market traders also rotated out of big tech mega-caps and into crypto stocks, gun stocks, and shares of other companies that could benefit from a Trump presidency.

Some of those moves cooled later in the day as markets zeroed in on comments from Fed Chair Jerome Powell who spoke at the Economic Club of Washington on Monday and reignited easing hopes. Powell told the audience "We didn't gain any additional confidence in the first quarter, but the three (inflation) readings in the second quarter, including the one from last week, do add somewhat to confidence." He also said the Fed won’t wait until inflation is down to its 2% goal before starting to cut interest rates as doing so risks overshooting the mark given the lagged effects of monetary policy.

On Tuesday, retail sales numbers came in better than expected, showing sales unchanged in June (vs. -0.3% expected) as a decline in receipts at auto dealerships was offset by widespread strength elsewhere. May retail sales were also revised up to 0.3% from 0.1%. Although goods spending rebounded, consumers continued to limit discretionary services spending. The print was not enough to change expectations that the Fed could start cutting interest rates in September, but it did help quell fears that the economy is headed toward a sharp decline.

The jittery markets continued their gyrations throughout the week. The 10-year pushed higher on Thursday despite news of a sharp jump in weekly jobless claims. Initial applications for unemployment benefits rose last week by the most since early May, adding evidence that the labor market is softening. Continuing claims also rose by 20,000 to 1.87mm, the highest level since November 2021.

To round out the volatile week, we all woke up this morning to news that a global tech outage had left businesses and services across the world unable to access necessary computing systems. Major airlines ordered ground stops amid communications issues, media companies, banks and telecom firms around the world found system outages disrupting their operations, even essential health and transportation services experienced delays. What is being called ‘the largest IT outage in history’ was initiated by a defect in a software update from cybersecurity giant CrowdStrike that caused Windows systems to crash for CrowdStrike customers. CrowdStrike’s says a fix has been deployed but it appears likely to take some time for the solution to be implemented across all data centers running Windows.

There is not much time for markets to calm next week because much focus and attention will be on positioning for the release of the Personal Consumption Expenditures (PCE) price index on Friday. PCE is the Fed’s preferred measure of inflation, and many hopes hang on a favorable reading. Expectations are for a 0.1% MoM increase with the YoY change falling to 2.5% from 2.6% previously. Have a great weekend!