The Nasdaq achieved another record high during this shortened trading week and the Russell 2000 pushed to a new 52-week high. Shifting interest rate expectations sent most shares sharply lower on Friday, but sparked a financials rally even as the S&P fell to July levels. Shares of SPDR S&P Regional Banking (KRE) lost 0.72 percent on the day, dramatically outperforming the S&P 500 Index, which lost 2.45 percent.
Foreign central banks did little to move this week’s markets. The Royal Bank of Australia left its key interest rate unchanged at a record low 1.5 percent, as expected, and Bank of England Governor Mark Carne said nothing noteworthy in his public testimony. On Thursday, the European Central Bank (ECB) left interest rates unchanged and said its bond-buying program will end as scheduled next year.
More importantly, 10-year German and Japanese government bond yields climbed to 0 percent, the highest level in two and five months. The odds of a September rate hike reacted in the U.S. futures market with a ten percent swing to more than 30 percent. While a September hike is still highly unlikely, a clear shift in sentiment is evident across global markets.
The week’s economic reports were mixed. As expected, the Job Openings and Labor Turnover Survey (JOLTS) reflected a large increase in job postings, offsetting a dip in the Federal Reserve Labor Market Indicator. The ISM nonmanufacturing index came in lower than expected. Mortgage applications rose less than 1 percent on the week, while weekly unemployment claims were lower than expected. The Federal Reserve Beige Book showed slow to moderate economic growth, little concern over inflation and minor wage growth. Hurricane Hermine disrupted oil supplies, which led to a drop in crude inventories. The price of a barrel of West Texas Intermediate Crude rose almost 8 percent on the week before falling back on Friday.
Overseas, the Chinese Purchasing Managers’ Index (PMI) for the service sector showed moderate growth and the Producer Price Index indicated approaching inflation trends follow years of deflation. The pound sterling rallied Monday when the UK PMI numbers outstripped expectations, suggesting the UK economy should dodge a recession in the second half of 2016. Eurozone retail sales grew a better-than-expected 1.1 percent from June to July as consumers on the continent shrugged off those same worries. Australia announced its 100th straight quarter of GDP growth on Wednesday, which is three calendar quarters short of the all-time record set by the Netherlands. Japan’s government announced a revised GDP number showing faster economic growth than initially estimated, while eurozone GDP growth slowed from April to June.
There were no major earnings surprises this week. Hewlett Packard Enterprise (HPE) officially announced the expected sale of its software business to Micro Focus for $8.8 billion during its Wednesday earnings report, which delivered better-than-expected earnings per share, but missed revenue estimates. Shares of HPE fell on the news. Shares of Kroger (KR) were flat following missed sales estimates in the prior quarter and lower guidance for 2016. Hovnanian (HOV) shares fell more than 10 percent after the firm also reported a loss in the prior quarter; analysts expected a profit. The miss dinged the homebuilder sector, sending iShares US Home Construction (ITB) down more than 2 percent.