What happened this week
- This week's brief is based entirely on quantitative indicators, as there were no official policy summaries or market commentaries reported in our inputs.
- US stock markets experienced a slight decline, with the S&P 500 index falling from 7457.69 to 7411.98 index points over the week ending 24 July [I1].
- The yield on the US 10-year Treasury bond—which sets the benchmark for global borrowing costs—rose from 4.55% to 4.71% per annum over the week ending 23 July [I2].
- Older economic data for the May-to-June period shows the US unemployment rate ticked down slightly from 4.3% to 4.2% [I4].
- The US Consumer Price Index (CPI), which measures inflation, decreased from 333.979 to 332.568 on its index scale during the May-to-June period [I5].
- The effective federal funds rate, the US central bank's benchmark interest rate, remained unchanged at 3.63% per annum for the May-to-June period [I3].
Why it matters
With no major news or commentary reported this week, our focus remains on the hard numbers. The most immediate market movement is the divergence between equities and bonds. As the US 10-year Treasury yield rose to 4.71% [I2], the S&P 500 index saw a modest pullback to 7411.98 [I1]. Typically, when bond yields rise, fixed-income assets become more attractive relative to shares, which can put downward pressure on stock market valuations.
Looking back at the economic backdrop from May to June, we see signs of a cooling but stable economy. The slight drop in the unemployment rate to 4.2% [I4] suggests the jobs market remained resilient. At the same time, the dip in the Consumer Price Index [I5] indicates that price pressures eased during that period.
This combination of easing inflation [I5] and steady employment [I4] occurred while the Federal Reserve held its key interest rate steady at 3.63% [I3]. Because we lack current qualitative commentary or policy statements for late July, it is unclear how these older trends are influencing the latest market moves, but the rising bond yields [I2] suggest investors may be adjusting their expectations for future interest rates.
What to watch next
- Watch for upcoming July employment and inflation data releases to see if the easing price trends [I5] and stable jobs market [I4] observed in the May-June period have persisted into the summer.
- Watch the US 10-year Treasury yield [I2] to see if it continues its upward trajectory or if it stabilises.
- Watch for future policy statements from the Federal Reserve to see if the central bank plans to adjust the federal funds rate from its 3.63% level [I3] in response to changing economic conditions.
Glossary
- Treasury yield: The annual interest rate the US government pays to investors who buy its debt securities.
- Consumer Price Index (CPI): A metric that tracks the average change over time in the prices paid by consumers for a basket of goods and services.
- Federal funds rate: The target interest rate at which commercial banks borrow and lend their excess reserves to each other overnight.