This week ahead || Jul 1st - Jul 5th 2024
June jobs report ushers in new quarter during holiday-shortened trading week: What to know this week
As July and Q3 begin, investors are focused on labor market data amidst a holiday-shortened trading week, with the S&P 500 and Nasdaq showing significant gains year-to-date. Key updates include the June Jobs report, expected to indicate a cooling job market with 188,000 new jobs and a steady 4% unemployment rate. Positive inflation trends and economic slowing suggest potential rate cuts by the Fed. Meanwhile, tech giants like Nvidia, Apple, and Microsoft have driven most of the market rally, sparking debate on whether this trend will broaden to other sectors in the year's second half.
Why Nvidia stock is now in treacherous waters: Morning Brief
High expectations can be a heavy burden, as seen with top performers in both life and the stock market. Nvidia, a top-performing stock, exemplifies this with its staggering market cap of $3.34 trillion and a sharp $430 billion drop in a few days due to profit-taking and competition fears. Nvidia's stock trades at a steep 21x forward sales, far above Microsoft and Apple. Such inflated expectations have made it prone to sharp sentiment shifts. Similar pressures hit Micron, whose earnings report failed to meet high AI-related expectations, causing its stock to fall. Despite varying opinions, Nvidia remains a market top performer that can't afford a bad day.
Jobs, inflation data may break the US Treasury market out of narrow range
Upcoming economic reports and Federal Reserve Chairman Jerome Powell's Congressional testimony could significantly impact U.S. government bonds, potentially breaking the current narrow trading range. Benchmark U.S. 10-year Treasury yields have fluctuated between 4.20% and 4.35% since mid-June. While recent data showed slowing inflation and cooling economic growth, doubts remain about the extent of Fed rate cuts this year. Next week's employment data, inflation figures, and Powell's testimony could alter this outlook. With the U.S. economy showing resilience, investors are cautious about significant yield drops, despite hopes for more rate cuts based on weaker data.
Rising trade policy uncertainty poses a downside risk to growth: Goldman Sachs
Increasingly hawkish global trade policy commentary and potential significant tariffs on U.S. imports under a possible Donald Trump presidency could lead to retaliation and escalation, according to Goldman Sachs economists. This has pushed trade policy uncertainty indices to their highest levels since the 2018-2019 trade war. This uncertainty could moderately hinder global growth as companies might delay investments until the policy outlook is clearer.
Goldman Sachs quantifies this risk in three ways:
- Historical Impact: During the 2018-2019 trade war, mentions of trade policy uncertainty in U.S. and European company earnings calls correlated with a decrease in year-over-year investment growth by 0.5 percentage points in the U.S. and 1.3 percentage points in Europe.
- Equity Returns Analysis: Companies perceived as more exposed to trade risk, especially in the materials and industrials sectors, reduced investments during tariff announcements, leading to a 0.3 percentage point decrease in U.S. investment growth and over 2 percentage points in the Euro area.
- Cross-Country Evidence: A rise in the U.S. trade policy uncertainty index to its trade war peak is associated with a 2 percentage point decline in year-ahead investment growth in major economies and a 3 percentage point decline among major exporters.
Averaging these approaches, Goldman Sachs estimates that a rise in trade policy uncertainty akin to the 2018-2019 trade war could lower GDP growth by about 0.3 percentage points in the U.S. and 0.9 percentage points in the Euro area. While such a rise is not their base case, the analysis suggests a moderate downside risk to growth in the latter half of 2024 and into 2025, particularly in Europe.
