Weekly Letter (8/10 - 8/14)
Executive Summary:
The markets this week were largely driven by economic reports released at the tail end of the week and geopolitics in the Middle East as Iran and the US continue to make slow progress towards any sort of agreement. The Bureau of Labor statistics released CPI and PPI showing inflation holding steady, followed by an underwhelming retail sales and consumer sentiment release on friday to close out the week. CPI came in at 0.1% MoM and 3.4% YoY, with core CPI at 0.2% MoM and 2.5% YoY, both slightly down from June and matching the consensus estimates. PPI MoM came in flat at 0% while PPI YoY came in at 4.2% which is a wider gap in comparison to consumer prices indicating a lingering cost pressure on producers. Retail sales dropped -0.6% compared to the consensus estimate that forecasted an increase of 0.1%. Consumer sentiment also came in lower than expected at 51 which is a drop from last month's number. In the Middle East, Trump publicly escalated rhetoric saying that the US would strengthen their stance on Iran and that the US would declare the Strait a US territory as it assumes “full control” over the geographic region. Pakistani mediators signaled that the two countries were nearing some sort of agreement but investors remained wary over the claim.
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Equities
WoW Performance: S&P 500 +0.4% | Nasdaq +1.09% | Dow -0.58%
Stocks this week were driven by the positive inflation reports out of the BLS pushing the S&P to all time highs on both Wednesday and Thursday but slowing the rally on Friday in response to the more underwhelming retail spending and consumer sentiment readings. Stocks made gains following both CPI and PPI as investors continue to play into future prospects of the Fed’s September decision on rates where the subdued inflation data caused markets to price in a lower probability of a rate hike in September from the Fed.
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Fixed Income:
WoW Yields: 2 Year -3bps | 10 Year +4bps | 30 Year +6bps | 2s10s Spread +7bps
The short term 2 year yield fell this week while the longer term 10 and 30 year yield climbed. Yields responded to the softer inflation data from the BLS causing investors to lock in a higher rate as the probability of a September rate hike has diminished causing yields to fall after the reports. While the 2 year yield finished lower on the week the 10 year recovered as the price of oil continued to ride into the end of the week causing the 10 year to rise 6 basis points. The 2s10s spread widened by 7 basis points this week showing investors continue to expect normal economic growth and inflation which comes as inflation has shown signs of slowing. The 30 year yield climbed 4 basis points this week as investors continue to worry over the widening federal deficit that has continued to put upwards pressure on the 30 year yield pushing it to it highest point since 2001.
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Commodities:
WoW Performance: Oil (Brent) +7.8% | Spot Gold +0.75%
Brent oil this week climbed in response to investor skepticism over the conflict in the Middle East. Although there was an announcement out of Pakistan that the US and Iran were making progress towards some type of agreement, Trump's escalation in rhetoric caused the price of oil to climb over the course of the week where it topped $89 a barrel. Gold also saw gains this week following inflation data in the US causing rate hike probabilities to decrease making gold a more attractive investment with the chance of lower rates in the future.
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Currency:
WoW Yields: DXY +0.03%
The dollar made small gains in the early half of the week despite cooler CPI and PPI inflation reports that were not enough to offset safe haven holdings of the dollar tied to the conflict in the Middle East. The dollar did however respond to the disappointing retail sales report that challenged that narrative of a resilient US economy causing the dollar to take a loss where it ended the week not far from where it started.
