Weekly Market Roundup
It was a week of rotation and reversal. The Nasdaq led the decline at -2.90%, the S&P 500 fell -1.55%, and international equities slipped -1.72%, while the Dow Jones was effectively unchanged. The Bloomberg U.S. Aggregate posted a modest gain of +0.13% as the front end of the yield curve softened following Tuesday's CPI data, though the long end of the curve held its ground, keeping the 30-year Treasury yield anchored near 5%.
Tuesday's CPI print for June came in well below consensus expectations, reinforcing the disinflation narrative we have been watching these past few months. The market responded quickly at the short end, pricing out the possibility of near-term rate hikes, and rate-sensitive, defensive areas of the market caught a meaningful bid. That momentum was interrupted by Friday's selloff, which pushed the VIX intraday toward the top of the investable range, driven in part by renewed tensions in the Middle East and a continued move higher in oil prices.
The broader trend in equities is notable: high-flying momentum and high-beta names have been under significant pressure for much of the past month, while the rotation into defensive and income-oriented areas of the market has been building. The dollar also showed further signs of breaking down this week, which is broadly supportive for international equities and commodities. The VIX closed at 18.07, remaining within the lower-volatility range.
The calendar this week leans toward labor and housing. ADP employment on Tuesday offers an early read on private sector hiring, followed by initial and continuing jobless claims on Thursday. A 10-Year TIPS auction on Thursday will be closely watched as a gauge of real yield demand and inflation expectations in the wake of this week's data. On the housing front, Building Permits and New Home Sales on Friday give us a read on how that market is absorbing the current rate environment, and the S&P Global PMI rounds out the week with a look at broader business activity. Oil inventories mid-week and the Baker Hughes rig count on Friday will be monitored closely given crude's recent re-acceleration.
The soft CPI print was a meaningful development, and it played out largely as we anticipated. Inflation came in below expectations, the short end of the curve moved lower, and defensive and bond-proxy equities responded. That part of the thesis is working.
The more nuanced picture is in the long end. Despite the encouraging inflation data, the 30-year Treasury is still hovering near 5%, and long rates have not broken below key levels that would signal a full embrace of the disinflation trend. As we see it, the market is pricing in a geopolitical risk premium alongside the inflation picture. Middle East tensions have pushed oil back toward recent highs, and as we have observed over the past 18 months, markets have repeatedly cycled through periods of escalation and de-escalation. Each time, oil moves, rates respond, and then the cycle fades. It is a pattern worth respecting.
We are watching our bond positioning carefully in this context. The underlying case, decelerating inflation, a softening labor market, and a Fed that is increasingly unlikely to tighten further, remains intact. But geopolitical uncertainty is creating real headwinds for the long end that we cannot ignore. We remain in our positions and are monitoring the situation closely, with a particular focus on how oil and long-end yields develop as the geopolitical picture continues to evolve. We will not hesitate to act if the evidence warrants it.
If you have any questions about the above, please reach out to us to set up a one-to-one meeting so we can review your situation.
Sincerely,
President
SBC Investment Management
P: (602) 641-5996 · M: (319) 520-2033 · E: bandrus@sbcinvestmentmanagement.com
Investment Analyst, Junior Portfolio Manager
SBC Investment Management
P: (435) 775-2950 · M: (435) 590-8317 · E: jrehkop@sbcinvestmentmanagement.com