Top things to watch this week
The Economic Calendar:
MONDAY: Empire State Manufacturing Index, 3-Month Bill Auction, 6-Month Bill Auction
TUESDAY: Retail Sales, Industrial Production, Business Inventories, Housing Market Index, Treasury International Capital
WEDNESDAY: MBA Mortgage Applications, Housing Starts and Permits, EIA Petroleum Status Report, 4-Month Bill Auction, 20-Yr Bond Auction
THURSDAY: Jobless Claims, Philadelphia Fed Manufacturing Index, Existing Home Sales, Leading Indicators, EIA Natural Gas Report, 4-Week Bill Auction, 8-Week Bill Auction, 10-Yr TIPS Auction, Fed Balance Sheet
FRIDAY: Baker Hughes Rig Count
Key Events:
- The Nasdaq-100 rebalance and effect on decreased index weights of the top 7 stocks.
- The earnings calendar includes reports from Netflix, Bank of America, IBM, and Tesla.
- Economic reports on Retail Sales, Existing Home Sales, and jobless claims.
- FOMC members are in a blackout period ahead of the Fed meeting on July 25-26.
- U.K. CPI (inflation) report on Wednesday.
- Seasonal summer trading volume expected lite.
QUICK WEEKLY RECAP
The S&P 500 futures wrapped up last week with a +2.1% advance.
10-year Treasury yields fell to 3.83%, and the U.S. dollar’s decline accelerated -2.2%, following more data showing cooling inflation.
WTI crude oil traded higher by +1.25%, Gold ticked a bit lower to $1,960 an ounce, and the VIX closed at 13.3.
FRONTRUNNING THE NASADAQ 100 REBALANCE
The Nasdaq 100 special rebalance will occur before the market opens on Monday, July 24, to address overconcentration in the index by redistributing the weights.
The current Nasdaq 100’s top seven companies account for 55% of the index.
Here are a few facts from the BofA quant team on the top seven stocks of the Nasdaq-100:
- Drove 73% of S&P 500 gains in last six months, each up 90% on average
- Have a market capitalization of roughly equivalent to half of US GDP
- Trade at a Price to Trailing Earnings ratio of ~40x. The S&P 500 ex-7 trades closer to 15x
- Are expected to represent all US corporate earnings growth and then some in 2Q–a 21% YoY gain vs a 10% YoY loss for the rest of the S&P 500.
U.S. DOLLAR INDEX FUTURES
The ICE U.S. Dollar Index, which measures a basket of six major currencies, is on pace to reach its lowest level in eight months. The index has fallen -2.2% over the past five trading sessions.
Traders reined in their bets on further interest rate rises from the Federal Reserve as cooling inflation makes it more likely that the Fed will ease its rate-hike campaign. The anticipation of higher rates over the last year had pushed the U.S. Dollar Index to the highest level in decades.
Interest Rate Futures
Last week, weaker CPI and PPI (inflation) reports adjusted the market optimism on both inflation normalization and Fed policy easing.
The data could lead to even more Fed easing being priced in Fed Fund and SOFR futures in the coming days, though we would look to fade that movement. We expect two more rate hikes this year.
Fed Fund Futures Scenario analysis (3 outcomes)
Assume, as does the market, the “certainty” of a July 25 basis point hike:
- Cut/Ease in Sept and Nov Fed Fund Futures down 20 basis points.
- No change in Sept and Nov Fed Fund Futures down 10 basis points.
- Hike/Tighten in Sept and Nov Fed Fund Futures up 10 basis points.
INFLATION
The inflation and wage data released last week point to price pressures moving in the right direction. Combined with other positive economic activity, this increases the probability of a soft landing.
The question remains whether this progress is sufficiently fast and what is the ultimate landing point for inflation. In this regard, last week’s data did not convince us the Fed will stop tightening policy before implementing another two 25 basis point hikes.
CRYPTO
Partial ‘WIN” for Ripple Labs, creator of the payments token (XRP). Ripple scored a partial victory in its fight with the SEC in a court ruling that brought some clarity to the cryptocurrency industry—in response, the XRP token surged +61%.
Last year Ripple and the SEC called for a ‘summary judgment,’ an expedited ruling when both sides agree on the facts of the case.
The judge ruled in a summary judgment that:
- Sales of XRP to accredited investors by Ripple are a security. This could result in violations of security laws and the risk of regulatory fines for Ripple Labs. Ripple might be ordered to return investor capital in full.
- Sales of XRP to retail via exchanges (positive for exchanges like Coinbase and Kraken) are not securities.
- ‘Other Distributions’ of XRP to employees are not securities.
- Executives Chris Larsen and Brad Garlinghouse did not ‘aid and abet’ securities laws violations.
Expect appeals to arise as the case progresses. The case will now proceed to trial.
Asset Class Performance Summary
This performance chart tracks the daily, weekly, monthly, and yearly changes of various asset classes, including some of the most popular and liquid markets available to traders.
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