The Weekly Stock Market Report (25 – 31 July 2015)Contributor JPMAM UK
US: FED-WATCHING DRIVES MARKET MOOD
- Speculation over the likely timing of an interest rate rise by the Federal Reserve (Fed) was the dominant theme on Wall Street in the week to 31 July. The broad S&P 500 closed 1.2% higher, while the Dow Jones gained 0.7% and the technology-heavy Nasdaq was up 0.8%.
- Following its meeting on Tuesday and Wednesday, the Fed’s policysetting committee signalled that it remained on track for a rate increase this year, pointing to “solid” job growth and an economy that is expanding “moderately”. Policymakers said they would raise rates when they had seen “some” further improvement in the labour market and gained reasonable confidence that inflation would move back up to the 2% target.
- Investors continued to expect a September rise, viewing the addition of the word “some” to the statement about labour data, which was otherwise unchanged from the previous meeting, as an indication that a policy move was imminent. Positive GDP data, released on Thursday, was viewed as strengthening the case for a September move.
- The US economy grew 2.3% in the second quarter, slightly below the consensus forecast of 2.5%. However, the first-quarter reading was revised upwards from a 0.2% contraction to a 0.6% expansion.
- The data underpinning the second-quarter acceleration was also strong, with consumer spending rebounding, led by robust demand for cars in an environment of weaker fuel prices.
- Confidence in a September move was shaken on Friday by news that the employment cost index, a closely watched measure of wage growth, had risen just 0.2% in the second quarter, the weakest quarterly gain since records began in 1982. The dollar fell and government bonds rallied sharply on the news, suggesting the market believes wage weakness may delay a Fed move, given the importance policymakers place on both jobs and inflation data.
- Companies continue to report earnings for the April-June quarter, with high-profile disappointments last week including a decline in quarterly profits at Facebook, while positive surprises included encouraging results for United Parcel Services, which is seen as a bellwether for the health of the US economy.
- With around two-thirds of S&P 500 companies now having reported, around 74% have beaten profit estimates and around half have exceeded revenue expectations, according to Bloomberg. Analysts expect earnings for the index overall to have fallen 2.8%, with declines led by the energy and materials sectors given continued commodity price weakness.
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