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Surprisingly good retail sales and industrial production numbers came in last week, continuing a string of good economic reports and increasing the odds of a September rate cut from the Federal Reserve. The market has undergone powerful gyrations this month, raising speculation of a rotation into heretofore unloved segments. A massive tech outage caused widespread disruption of airlines, banks, hospitals and other organizations.
We’ll have existing home sales on Tuesday; new home sales on Wednesday; second quarter gross domestic product, initial jobless claims and durable goods orders on Thursday; and PCE and consumer sentiment on Friday. Our strategists and portfolio managers cover the latest geopolitical, market and economic trends in our Insights section.
What
What
July 22, 2024
Weekly
October 2022
Additional resources
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Election Watch 2024
Our fixed-income taxable multi-sector portfolios are underweight high yield and commercial mortgage-backed securities (CMBS), U.S. Treasuries, agencies, overweight MBS, and emerging markets and neutral on investment-grade corporates. Tax exempt munis are attractive for investors in the top tax brackets in non-qualified accounts, despite currently rich ratios to Treasuries. We hold a neutral duration position and are positioned for a longer-term steepening of the yield curve.
Fixed income
Domestically, we continue to prefer defensive, dividend-paying stocks and are slightly underweight rate-sensitive large growth stocks. We’re overweight small-cap growth and large-cap value. Outside the U.S., we’re neutral on international large-cap and overweight emerging markets.
Elections were key features of the global scene, particularly in the U.K. and France. In the U.K., the Labour Party came to power after 14 years in opposition. Prime Minister Keir Starmer enjoys a strong majority in Parliament, but his range of action may be limited by what is fiscally feasible at present. In any case, Labour’s victory came as no surprise to markets. By contrast, France underwent a political earthquake in recent weeks. President Macron unexpectedly called a snap parliamentary election. The result was a poor showing by the centrist parties and a distribution of parliamentary seats into three blocs—left, right and center—none of which has sufficient size to govern without a coalition partner.
Inflation in the euro zone fell to 2.5% in June, but analysts still expect the European Central Bank to refrain from a further rate cut at its July meeting. In the U.K., inflation fell to the Bank of England’s 2% target in May, but it is not clear that one reading alone will be enough to prompt a rate cut there. In China, 370 Communist party leaders are due to gather July 15-18 for the Third Plenum meeting.
Inflation remains high but the recent resumption of downward momentum continues. The consumer price index fell in June to 3% from 3.3% the month before. This report follows word that core PCE fell from 2.6% in May from 2.8% the month before. Investors increasingly speculate that the Federal Reserve will initiate rate cuts in September, though some suspect the election campaign will prompt the Fed to wait until its November meeting, shortly after Election Day.
For now, the U.S. economy continues to hold up well, with the most recent jobs report showing 206K job gains in June, a “Goldilocks” number that reveals continuing strength but not so much as to prompt new wage pressures. Unemployment ticked higher to 4.1%, though, causing some concern. Indeed, Fed Chair Jerome Powell recently testified before Congress that the balance between inflation and unemployment now seem about even, meaning that the central bank can no longer take continued jobs growth for granted and may need to begin cutting rates.
Economies
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December
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Job Openings and Labor Turnover
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Consumer Price Index
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Standard and Poor's
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Institute of Supply Management
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Bank of England
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Emerging Markets
U.S. economy
International economy
U.S. Equity
Positioning
London’s FTSE Index fell in June, as did the Euro Stoxx 50 and the MSCI All Country World ex USA, while the Nikkei rose. Year to date, international stocks, including emerging markets, continue to lag the U.S. while nonetheless showing positive returns.
The equity rally continued in June, with the S&P 500, the Dow and, especially, the Nasdaq once again posting strong gains on the month. On a sector basis, Information Technology, followed by Consumer Discretionary and Communication Services led outperformance versus the S&P 500, while Utilities, Materials and Industrials fared worst.
International Equity
Fixed income performance improved over the quarter but ended June continuing to reflect the low starting point in U.S. Treasury yields from late last year, with the Bloomberg US Agg still in negative territory at -0.71%. Recent range-bound swings in Treasury yields display the market’s hyper-sensitivity to directional indicators, as anticipation of fall interest rate cuts intensifies. Inflation matters, but the Fed is transitioning to the dual mandate of inflation and jobs. We believe complex post-pandemic economic dynamics have helped make The Fed more data dependent than forward looking. This stance often leads to more volatile moves in interest rates after economic numbers than would previously be expected in a more forward looking model driven monetary policy framework.
Positioning
Liquidity
Equities
Economies
Liquidity
Fixed Income
Equities
Economies
July 2024
Monthly
While money market yields are compelling, maintain a bias to lengthen duration.
Take a balanced approach to credit due to tight valuations but a stable economic environment in the near term.
Use mortgage-backed securities where possible to capitalize on available carry and prepare for potential benefit of future spread compression.
Relative to longer-term fixed income, the 0-3-year part of the yield curve is attractive. These themes are guiding our investment views in the space:
Positioning
We received an updated Summary of Economic Projections (SEP) following the June Federal Open Market Committee (FOMC) meeting. Notably, policymakers increased their year-end projection of core PCE – the Fed’s preferred measure of inflation – from 2.6% to 2.8%, while reducing expected rate cuts by year-end from 75 basis points (bps) to 25 basis points. The previously announced slowing of the pace of balance sheet run-off – aka Quantitative Tightening – went into effect this month and there were no further changes made at the June meeting. From a messaging standpoint, Powell was more dovish, saying that the May inflation reports were “a step in the right direction” and that no one on the committee expects to hike rates again.
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Chief Information Officer
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Federal Open Market Committee
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Producer Price Index
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European Central Bank
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third quarter
U.S. fixed income
International
International markets continued to lag the U.S. Benchmark French government bonds lost -1.76% in the wake of President Macron’s dissolving the National Assembly. This development came as a complete surprise to global investors and derailed the Euro’s prior 2% monthly gain in a matter of days. In contrast, similar German government bonds were flat on the month and the U.K. election proved less disruptive. After several months of outperformance, emerging markets fixed income was negative in June as elections in Mexico, South Africa, India, and Indonesia caused an increase in bond market volatility.
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Personal Consumption Expenditures
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High Yield
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Artificial Intelligence
Read our Fixed Income committees’ current views and positioning >
International markets continued to lag the U.S. Benchmark French government bonds lost -1.76% in the wake of President Macron’s dissolving the National Assembly. This development came as a complete surprise to global investors and derailed the Euro’s prior 2% monthly gain in a matter of days. In contrast, similar German government bonds were flat on the month and the U.K. election proved less disruptive. After several months of outperformance, emerging markets fixed income was negative in June as elections in Mexico, South Africa, India, and Indonesia caused an increase in bond market volatility.
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December
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United Auto Workers
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Overweight
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Probability Risk and Impact System
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Johnson & Johnson
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National Association of Home Builders
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National Federation of Independent Business
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Organization for Economic Cooperation
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Standard & Poor's
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Standard & Poor's
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Purchasing Managers Index
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fourth quarter
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Bank of Japan
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Purchasing Managers Index
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Quarter on Quarter
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Consumer Price Index
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Kansas City
Signs of strength in U.S. economy
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Institute of Supply Management
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Job Openings and Labor Turnover Survey
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United Kingdom
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United States
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Consumer Price Index
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Artificial Intelligence
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Consumer Price Index
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Environmental Impact Assessment
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Bank of Japan
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Mortgage Bankers Association
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Financial Times Stock Exchange
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United States
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United States
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Consumer Price Index
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Fear of missing out
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Institute of Supply Management
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United States
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Federal Open Market Committee
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United States
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United States
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Job Openings and Labor Turnover Survey
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United States
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Standard and Poor's
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National Federation of Independent Business
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United Kingdom
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United Kingdom
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Thousand
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Personal Consumption Expenditures