Lingering trade tensions with China have produced growing concern over the potential of an oncoming recession. Subsequently, all eyes turned to the Federal Reserve during the month of July and hopes for a proactive easing cycle grew, with many models pricing in multiple rate cuts yet in 2019. Even as indicators largely pointed to continued economic strength, investors chose to focus on the prolonged trade dispute and a slowing GDP projection. In July, employment data remained strong, with job creation remaining robust and unemployment staying low at 3.7%. Subsequently, the consumer remained assured, with consumer confidence at or near ten-year high marks, and willing to spend as retail sales continued to be robust. Inflationary pressures remained gentle but did up-tick slightly with the CPI coming at 2.1%. However, manufacturing sentiment continued its slowing trend with the ISM at 51.2, inching toward the neutral rating of 50. Indeed, GDP did slow during the second quarter as the growth rate was reported at 2.1%, although bettering survey estimates of 1.8%. On the last day of July investors received a mixed bag from the Fed. While they announced the first rate cut since 2008, a 25 basis point reduction in their Fed Funds target from 2.50% to 2.25%, they disappointed many market participants with a statement that tempered hopes of more significant easing forthcoming.
Despite concerns over the impact of corporate profitability from the Chinese tariffs, equity markets posted another solid month of returns in July. Counting on support from the Fed, markets were initially satisfied with the reduction to the Fed Funds rate, however statements following the decision deflated investor hopes of further cuts and subsequently shaved over 1% off the monthly returns. Again, the tech laden NASDAQ index led the way with a 2.16% return for July as technology related stocks continue to lead the market. All major domestic indices finished in positive territory. International equities sustained their losing streak versus domestic stocks, with foreign indices finishing the month with negative returns.
July saw a rather sedentary fixed income market that produced relatively slight returns. Most action in bonds was tied to producing a flatter yield curve in response to increasing recessionary fears. During July the curve flattened by 13 basis points, as the 2-year yield rose from 1.76% to 1.87% while the yield on the 10-year Treasury increased by about one bp to 2.02%, leaving only 15bps difference between these maturities. An increase in rates across short to intermediate treasuries saw indices tied to shorter rates or comprised primarily of Treasuries produce negative returns for July. Indices with longer issues and those representing credit sectors produced positive returns. Both corporate and high yield sectors continue to set the pace for bond market returns.