WEEKLY | USA: PRESIDENTIAL ATTACKS
Your weekly summary with the most important news for your investments.
Last week we had a packed agenda of information starting with the presentation made by the Federal Reserve (FED) Chairman Jerome Powell in front of both houses of Congress, followed by the declining inflation data and finally the quarterly results of the main financial institutions in the country while President Biden faced the media and representatives of the Democratic Party who have been claiming that he will not be able to face former President Trump given the cognitive fragility he is going through. It was in this environment that stock indexes continued to climb until mid-week and then took a breather going into the weekend. For example, the Dow closed once again above 40 thousand points, accumulating a +6.1% return so far this year, while the S&P 500 and Nasdaq accumulated returns of +17.7% and +22.6%, respectively. The 10-year sovereign yield eased -10 basis points to close the week at 4.19% as inflation eases and the probability of a possible 25 basis point drop in the monetary policy rate in the coming months becomes more present (currently at 5.5%). This in an environment where quarterly results from Citigroup, JP Morgan Chase and Wells Fargo showed mixed results at the beginning of the second quarter results season.
However, already on Saturday afternoon, the assassination attempt against Trump made headlines, leaving the majority of the U.S. population shocked, a subject that we will address in more detail. One civilian was killed and two other people were wounded. The sniper, Thomas Matthew Crooks, was shot dead at the scene of the crime and the investigation into the motives for the assassination of the presidential candidate is still ongoing.
Yesterday, Sunday, for those of us who like soccer, Spain won the Euro Cup against England (2-1) and Argentina, in a dramatic match and with a late start, beat Colombia to win the Copa America for the second time in a row (1-0).
This week will start with a verbal intervention by Powell today, Monday at noon, to follow up on retail sales and industrial production data and close the macroeconomic week with the release of the Beige Book on Wednesday.
On the corporate front we will have the release of quarterly results from 45 S&P 500 companies including American Express, Bank of America, BlackRock, Goldman Sachs, Morgan Stanley, Netflix and Travelers among many others. According to Factset sales have been expanding +4.8% while earnings have been expanding +9.3% from the second quarter of last year.
On the political front, today begins the Republican Convention in Milwaukee, Wisconsin, where Trump will be officially nominated as the party's presidential candidate under intense security after the events of the weekend. On the other hand, President Biden will hold another round of press conferences trying to prove that he is up for re-election showing physical wear and tear as the days go by.
Let's start with last month's inflation data, where the headline figure fell to 3% (from 3.3%) while the core inflation, which excludes food and energy prices, closed at 3.3% (from 3.4%) with a downward trend. This allowed Powell, in front of Congress, to mention the following:
We do not expect it would be appropriate to reduce the target range for the federal funds rate until we have greater confidence that inflation is moving sustainably toward 2%. However, the most recent inflation readings have shown some additional modest progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2%.
He further noted:
If we see the labor market weakening unexpectedly, that is, more than we have seen unexpectedly materially, then we could respond to that as well, because we have a dual mandate and we now see the two mandates more balanced than we did a year ago. We are very aware that we now face risks in both directions. The labor market appears to be fully balanced. After a lack of progress toward our 2% inflation target in the first part of this year, the most recent monthly readings have shown modest additional progress.
This allowed market participants to assign a high probability that the Fed could cut its rate at the September policy meeting. However, it remains to be seen whether the price of oil will budge in the coming weeks in the face of the heat wave the country is experiencing and wage inflation continues to move towards 3.5%.
On the corporate front, the results of the country's main financial institutions attest to a slight deterioration in consumer loan portfolios. This led the CEO of JP Morgan Chase to note the following:
While market valuations and credit spreads appear to reflect a fairly benign economic outlook, we remain vigilant about potential tail risks. These tail risks are the same ones we have mentioned before. The geopolitical situation remains complex and potentially the most dangerous since World War II, although its outcome and effect on the global economy remain unknown. Second, there has been some progress in reducing inflation, but there are still multiple inflationary forces in front of us: large fiscal deficits, infrastructure needs, trade restructuring and remilitarization of the world. Therefore, inflation and interest rates may remain higher than the market expects. And finally, we don't yet know the full effects of quantitative tightening on this scale.
In addition, on the corporate front Alphabet (Google) is reportedly buying Wiz, a cybersecurity company, for $23 billion, AT&T suffered a cybersecurity attack that would have impacted most of its 110 million customers and Stubhub delayed its initial placement until at least September citing inadequate market conditions.
Finally, without making any value judgments about what has been going on, the Trump assassination attempt coupled with a growing demand by insiders on the part of the Democratic party for Biden to withdraw from the race are attempts to prevent the two candidates from making it to the next November 5. Undoubtedly, if either of them, for unexpected reasons, cannot stay in the race, the remainder of the campaign will be unprecedented. There are those who would prefer substantially younger candidates to run the country, however, we will have to wait until mid-August to determine if both can stay in the race.
In conclusion, this week we will not only have a series of interventions by Trump seeking to position his candidacy after what happened last Saturday, but we will also see if the quarterly results justify the market valuations.
Now you have more information about your investments. See you next week with more news.
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