Stocks Soar While Services PMI Weakens

The past few weeks in the stock market have been much like 2017 as there hasn’t been much volatility. The VIX is now down to 11.64 and the S&P 500 is closing in on its January record. The S&P 500 was up 0.46% to 2,840.35. It only needs to go up 1.1% to reach its record high. That will be tough to reach next week because the CNN Fear and Greed index is at 71 out of 100. Heading straight for the record would put the market at a very overbought level. In terms of the fear and greed index, which you can see in the chart below, the market would probably be as overbought as it was in January, but not as overbought as the 2017 peak.

The Russell 2000 was down 0.52%. The best sectors were real estate, utilities, and consumer staples as they were up 1.28%, 1.03%, and 1.17% respectively. The only loser was energy which was down 0.47%. Oil’s drop to the high $60s has hurt the energy sector, but has helped its end users. A happy medium for the market is where oil is at now because energy firms are profitable, while headline inflation is still tepid.

Treasury Yields Fall

For a brief moment, the 10 year yield was increasing furiously, the curve was steepening, and I had to admit my prediction that the 10 year yield wouldn’t hit 3% again this cycle was wrong. That moment is over as yield fell on Friday. The 10 year Japanese yield fell from its peak of 14 basis points to 11 basis points. If the BOJ is only going to allow it to get to 20 basis points, there isn’t much room for it to increase further. Without this increase, the U.S. 10 year may not have much room to increase. The 10 year yield fell 3.71 basis points on Friday to 2.9488% as 3% acted like a ceiling on Wednesday. The 2 year yield fell 2.02 basis points which means the curve flattened to a difference of 30.56 basis points.

June Factory Orders

The June factory orders report showed 0.7% month over month growth which missed the consensus for 0.9% growth and was above the prior month’s growth rate of 0.4%. Transportation, aircraft, and vehicle orders were all up. Excluding them, orders were up 0.4% which is the same as the advanced report. As you can see from the chart below, new orders for non-defense capital goods excluding aircrafts were up 0.3% in June. Growth has been stabilizing at this plateau.

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