Weekly Letter (6/29-7/2)
Markets this week were most heavily driven by Thursday morning’s job report where the Bureau of Labor statistics reported that the US economy added 57k jobs during the month of June which was nearly half of the expected 110k added jobs. Coming off of 3 months of strong jobs reports where reports exceeded expectations, the miss was enough to reset the Fed’s rate cut expectations for the end of the year which had rippling effects through equities, rates, and commodities. One missed jobs report would just seem to be noise but last month's miss and the drop in labor participation rate from 61.8% to 61.5% along with the unemployment rate from 4.3% to 4.2% suggest that job seekers seem to be giving up and leaving the labor market, a sign that the labor market is weaker than the unemployment rate suggests.
Equities experienced gains this week with the S&P 500 closing at 7,483.25 with a +0.9% for this holiday shortened week. Equities rebounded from last week's AI bubble anxieties and were pushed along early in the week by an announcement on Monday of an $880 billion investment out of South Korea into semiconductor companies and later on by the underwhelming jobs report. The underlying market mechanics in equities were driven by positioning. Early in the week funds were long on tech and semiconductor stocks while being short on industrials. However, after the jobs report Thursday which effectively increased the odds of a Fed rate cut later this year, it caused funds to cover their short industrial positions pushing the Dow up 600 points to record highs and causing the Nasdaq to fall 0.8% where funds closed out their long semiconductor positions.
The 2 year yield closed at 4.14% and added 7 basis points (+0.07%) and the 10 year yield closed at 4.49% and added 11 basis points (+0.11%) over the course of the week. The 10s2s spread widened by a total of 4 basis points finishing off the week at 35 basis points (0.35%). The 2yr yield increased early this week (Mon-Wed) in response to Kevin Warsh’s hawkish tone but after the poor jobs report Thursday morning, yields backtracked slightly on the early week hawkish gains but still ending the week positive, showing investors are pricing in a rate cut in the coming year. The 10 year yield increased this week in response to worries over inflation after more US strikes in Iran over the weekend and the hawkish rhetoric from the Fed.
Over the course of the week gold has increased 2.1% closing at $4,175 moving in the opposite direction of the 2yr yield on Thursday as the outlook for a Fed rate hike has significantly diminished where the possibility of lower interest rates has made gold more attractive for investors. The price of oil (Brent Crude) dropped this week in response to traffic being partially resumed through the strait of Hormuz as the US and Iran make progress towards an official peace deal. The drop in oil prices also took off pressure from the US dollar as countries don’t need to convert as much of their local currency to USD causing the dollar to drop off later in the week.
