Yesterday we saw the Dow Jones industrial average open down more than 1000 points. By the end of the day, stocks had climbed their way back somewhat, but ultimately closed down nearly 600 points. We have a slight rebound this morning, but the index is still down around 12.5% from its highs in May.
Last week in review:
German and Dutch finance ministers voted to approve sending funds to Greece, worth a total of €86 billion. Greece was then able to make a €3.2 billion payment due to the ECB on Thursday of last week. Greece’s Prime Minister Alexis Tsipras also resigned last week, with elections now being scheduled for next month.
The bigger news stemming from last week surrounds China. Following the devaluation of China’s currency two weeks ago, concerns have been mounting about China’s economic growth outlook. Combined with expected higher interest rates and Fed minutes that revealed concerns about slowing global growth, this led to the largest five-day selloff that the stock market has seen in a long time. In China, stocks opened 6.4% lower on Tuesday, following an 8.5% drop on Monday. Stocks in China are down nearly 25% in about a week.
Last week the CPI index (inflation) revealed a year-over-year inflation rate of only 0.2%. Although the Fed prefers to follow the Core PCE measure of inflation, if the CPI index gives any indication, it would say that the Fed will be hard-pressed to raise rates in September, with December being more likely.
We have already been experiencing extreme volatility in the bond market stemming directly from the volatility of the stock market. Yesterday morning the 10-year treasury yield reached 1.90%, but is back up to 2.10% today. However, even with the higher treasury prices yesterday, bids were weak due to the uncertainty around prices. Support levels for the 10-year treasury are now at 2.11%, 2.22%, and 2.42% at the top of the range, while the next resistance level is now yesterday’s low of 1.90%.
As for economic data this week, on Thursday we will get the quarterly GDP figure, as well as the Core PCE figure. Both of these numbers are highly watched by the Fed when determining the timing of raising rates. Right now, the market expectations are more in favor of the Fed choosing to wait to raise rates until at least December. The market’s expectations range anywhere from a 25-35% chance that rates could increase in September. Also, keep in mind that the most recent Fed minutes that were released came from their last meeting, which was before China devalued their currency and before equities in the US lost over 10% of their value.
Eric Swanson, CFA