Market Note – July 9, 2024

By Hightower Great Lakes on July 9, 2024

Deciphering Economic Data

Economic data appears to be showing signs of a slowdown. Last week’s initial claims came in at 238,000, above the 2024 low of 194,000 and still well below highs seen in recessionary periods (over 600,000 in 2009).

Nonfarm payrolls increased by 206,000 in June, more than expected, but came with lower revisions for both May and April to the tune of -111,000 total jobs. Also, the unemployment rate ticked higher to 4.1%, the highest since November 2021.

As we have highlighted, housing data remains weak, but we believe it is in the process of troughing. Housing starts in May came in -5.5% m/m, and mortgage rates remain near 7%.

We think GDP growth will come in near 2% for 2024, with the latest Atlanta Fed GDPNow tracker estimate showing 1.5% annualized growth in Q2. Inflation is still on its descent lower, a positive sign for markets and the economy, and is expected to come in at 3.1% y/y in June – below May’s reading of 3.3% y/y.

Slowing inflation, coupled with signs of slowing growth, opens the door for the Fed to possibly cut rates sooner than anticipated. We are still of the belief that the Fed does not need to cut rates in 2024, but investors are becoming more hopeful for a 25 bp cut in September (72% probability, up from 57% last week).

Going forward, earnings will likely be the main driver of further market growth. Financials will begin the Q2 reporting season this Friday.

Chart 1: Some Economic Indicators Are Showing Signs of Slowing[1]

Yield Curve Flattening

The 2s-10s yield curve has now been inverted for over two years and saw sharp steepening into the end of June. An inverted yield curve has historically been an indicator of a pending recession, but the U.S. has been able to weather the storm of higher short-term interest rates thus far.

2-year Treasury yields are -5.7% over the last month, while 10-year Treasury yields are -3.4% over the same period. The 2s-10s inversion currently sits at -32 bps, above the 2024 lows of 47 bps.

In the long-term, a normal, upward sloping yield curve points to economic growth and expansion. The normalization of the yield curve following an inversion usually occurs at the front-end of a recession – a trend we are watching, along with slowing economic data.

Chart 2: The Yield Curve Inversion Flattened 14 bps in 2 Weeks[2]

Fixed Income

Treasury yields fell across the Treasury curve last week in a bull steepener that pushed the 2s-10s curve 2 bps steeper to 32 bps inverted. The 2-, 10- and 30-year yields fell by 15, 12 and 9 bps, respectively.

Attention shifts to the economic releases of the June CPI and PPI releasing July 11 and 12, respectively. High yield spreads widened by 8 bps to +356. Muni yields followed Treasuries, with yields falling 2-3 bps across the curve.

U.S. corporate credit ratings improved last week as the main rating agencies issued 17 upgrades and 14 downgrades. Materials saw the most upgrades, while industrials saw the most downgrades. 76% of July’s Municipal principal and interest was paid out to bond holders on July 1, as issuers returned $27 billion of principal and paid $11 billion of interest.

The Week Ahead

Earnings – Thursday: CAG, DAL, PEP; Friday: C, FAST, JPM, BK, WFC.

Economics – Tuesday: NFIB Small Business Index; Wednesday: Wholesale Inventories; Thursday: June CPI, Hourly Earnings; Friday: June PPI, Michigan Consumer Expectations.

Return for Selected Indices^[3]

Click here to read last week’s Market Note (7/2).

Disclosures

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This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet. As of July 7, 2024.

[2] Source: FactSet. As of July 7, 2024.

[3] Source: Bloomberg. As of July 8, 2024.