Weekly Letter (7/27 - 7/31)
Executive summary:
Markets this week were primarily driven by the US Fed decision, the ongoing geopolitical conflict in the Middle East between the US and Iran, US economic data on GDP and inflation, and the AI/Chip selloff in continuation from the previous week. The Fed decided to hold rates at 3.5% - 3.75%. The US and Iran tensions remain unsolved. PCE inflation data came in cooler than expected at 0.1% MoM versus the consensus of 0.2% MoM. GDP growth for Q2 came in at 1.5% versus the consensus 2.1%. AI/Chip overspending worries continue
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Equities:
WoW Performance: S&P 500 +1.03% | Nasdaq +0.52% | Dow +0.53%
The S&P and Nasdaq experienced a volatile week driven by the AI/ Chip selloff from the previous week due to investor concern over the large scale investments from the leading AI and tech companies, and the Fed’s decision on Wednesday that caused a mid-week sell off. The Fed held rates at the 3.50% - 3.75% range as expected but Kevin Warsh’s hawkish tone spooked markets driving the mid-week selloff and sending the indices into the red. This move turned positive the next open as PCE came in at 0.1% which was cooler than the 0.2% consensus prediction indicating that inflation is cooling off for consumers giving the markets hope that Fed tightening might be over.
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Fixed Income
WoW Yields: 2 Year -5bps | 10 Year +6bps | 2s10s Spread +11bps | 30 Year +4bps
Yields this week were driven by the increase in Oil price and the Fed’s decision to hold rates followed by hawkish commentary from several Fed officials after the meeting. The 2-year yield dropped 5bps while the 10-year increased 6bps and 30-year increased 4bps to its highest point since 2007. The 2s10s spread steepened this week with the spread widening by 11bps to 47bps indicating the markets concern over future inflation. The PCE data released Friday appeared to have limited effect on yields despite showing favorable data.
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Commodities
WoW Performance: Oil -9.46% | Spot Gold -0.19% | Copper +1.56%
Early this week the price of Oil fell below $90 a barrel as the US paused their striking campaign against Iran over the weekend which extended to the middle of the week. Additionally, negotiations between Iran and Oman took place in an effort to restart shipping through the Strait of Hormuz, helping to push the price of oil down as well. The pause in hostilities did not last long however as Iran fired missiles at American troops Wednesday night causing oil to make gains once again where it topped $90 a barrel and remained there until Friday's close. Gold experienced a volatile week driven by the conflict in the Middle East and interest rate decisions in the US where it finished almost flat on week netting -0.19%. Gold came down this week in reaction to the pause in strikes earlier in the week but jumped again on the 29th when leading up to Kevin Warsh's decision to hold rates where it later sold off. Copper this week was driven by China's high demand and the Fed’s decision to hold rates, easing the concerns over industrial, tech, and construction financing costs that are heavily tied to the price of copper.
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Currency
WoW Performance: USD -1.7%
The Dollar fell this week in response to the Fed’s decision to hold rates which caused those who anticipated a hike in interest rates to sell causing a drop immediately after the announcement. The dollar also responded to the cooler than expected PCE inflation report as well as the slower than expected GDP growth report both hurting the dollar's growth and rate vs other currencies.
