Hello, my friends!
U.S. financial markets enjoyed another banner week, powered by robust earnings and growing optimism on the trade front.
By the toll of Friday’s closing bell on Wall Street, the Dow Jones Industrial had risen 1.3% on the week, while the tech-oriented Nasdaq Composite and S&P 500 had climbed 1% and 1.5%, respectively. The biggest catalyst of the upward momentum was another wave of strong earnings reports, including those of Alphabet (GOOGL) and Verizon (VZ). According to FactSet data, well over 80% of the 169 S&P 500 companies which have reported earnings so far this season have beaten the consensus estimates.
Another positive influence on markets last week is growing optimism over the outlook for trade relations. The White House announced a “massive” trade agreement with Japan, the structure of a new trade deal with Indonesia, and the expectation that a spate of new trade accords – including one with the European Union – will be in place before the August 1 tariff deadline.
And as for the economic week’s other notable news and numbers…
Growth in S&P Global’s Flash Composite PMI Belies Weakness in Manufacturing Sector
Among the week’s most prominent data reports was the release on Thursday of the July Flash U.S. Purchasing Managers’ Indexes from S&P Global. “Flash” PMIs are advance estimates of the final numbers that come out at the end of each month and are calculated using roughly 85% to 90% of the survey responses.
As for this month’s numbers, the Flash U.S. Composite PMI, which is a weighted average of the Manufacturing and Services PMIs, ticked up 1.7 points to land at 54.6, the highest reading for the overall index since December.
But this month’s devil was in the details, as the saying goes. While Flash Services PMI energized much of the growth in the overall metric, jumping 2.3 points this month to come in at a seven-month high of 55.2…Manufacturing PMI fell nearly 3.5 points to 49.5. Not only is that a seven-month low, but it marks the first time this year that Manufacturing PMI fell below the key threshold of 50 to land in contraction territory.
In a statement, Chris Williamson, chief business economist at S&P Global Market Intelligence, telegraphed his doubts about continued increases in Composite PMI, saying:
“Whether this growth can be sustained is by no means assured. Growth was worryingly uneven and overly reliant on the services economy as manufacturing business conditions deteriorated for the first time this year, the latter linked to a fading boost from tariff front-running.”
“Business confidence about the year ahead has also deteriorated in both manufacturing and services to one of the lowest levels seen over the past two-and-a-half years,” Williamson added. “Companies cite ongoing concerns over the impact of government policies, notably in terms of both tariffs and cuts to federal spending.”
Big Drop in Civilian Aircraft Orders Drags Down June’s Headline Durable Goods Metric
In other news this week, the Census Bureau reported on Friday that orders for durable goods tumbled 9.3% in June, a sharp turnaround from the 16.5% gain posted in May.
The big drop last month didn’t set off any alarm bells on Wall Street, however. One reason is that as sizable as the decline was, it still was less than the 11.1% drop that economists were expecting.
But the bigger reason no one seemed to sweat the decline is because most of it was attributed to significant weakness last month in the transportation sector, which is notoriously volatile and not viewed as representative of business behavior in the underlying economy.
By the numbers, new orders for transportation equipment, overall, fell 22.4% in June following a 48.5% rise in May. Much of that decline was triggered by a whopping 51.8% drop in orders for civilian aircraft and parts.
So, just how much can transportation activity impact the headline durable goods number? Excluding transportation, which is another way analysts look at the data when they want to get a better sense of fundamental business investment, durable goods orders increased 0.2% last month.
In fact, Ali Jaffrey, economist at CIBC Economics, saw much to like in the June report, saying it’s “a testament to the resilience of the U.S. economy in the face of significant tariffs and uncertainty.”
But other observers still expect tariffs to negatively impact these numbers later this year, with Wells Fargo economist Sam Bullard making this projection:
“We look for business equipment investment to decline in the second half of the year as survey details still point to worries about tariff impact, high input costs and potential supply chain disruption.”
Sales of New and Existing Homes Disappoint in June as Mortgage Rates Remain a Distinct Challenge
This week also saw the release of two widely followed housing metrics, both of which disappointed the expectations of economists and together reinforced the narrative that little in the way of good news is likely forthcoming in the real estate market until there’s a meaningful drop in interest rates.
On Wednesday, the National Association of Realtors (NAR) announced that sales of existing homes fell 2.7% month over month in June to land at a seasonally adjusted annualized total of 3.93 million units. Analysts had expected to see a more modest decline of 0.7% last month.
Currently, sales of previously owned homes remain stuck at their lowest levels in roughly 30 years.
Then, on Friday, the Census Bureau doubled down on the bad news in the housing sector, reporting that sales of new single-family homes increased last month by an amount well short of what economists had projected.
According to the data, new-home sales rose just 0.6% in June to come in at a seasonally adjusted annualized rate of 627,000 units…just 4,000 more than the number for May. Heading into the week, analysts were looking for a jump to 650,000 units, which would have translated to an increase of more than 4% from May’s 623,000.
Economists pointed to mortgage rates that remain stuck at just under 7% as the principal culprit in the disappointing sales activity throughout the U.S. housing market.
“High mortgage rates are causing home sales to remain stuck at cyclical lows,” said Lawrence Yun, chief economist for the NAR, this week. “If the average mortgage rates were to decline to 6%, our scenario analysis suggests an additional 160,000 renters becoming first-time homeowners and elevated sales activity from existing homeowners.”
How soon we see rates down to 6% is anybody’s guess, however. Mortgage rates are largely a function of Treasury yields, and those are likely to remain elevated as uncertainty about tariff impacts continues to hang over the economy.
ECB Leaves Rates Unchanged as Inflation Cooperates and Trade Uncertainty Persists
Finally this week, the European Central Bank took a pass on making any changes to interest rates, the first time that central bankers in the Eurozone have stood fast on monetary policy this year.
Thursday’s decision to leave rates at 2% was made largely because of growing uncertainty at the ECB over what lies ahead for the economy as trade negotiations continue between the U.S. and the European Union.
The ECB reduced rates at each of its four previous meetings this year, bringing the deposit facility rate from 3% in January to 2% in June. With annual inflation in the Eurozone coming in right at 2% last month, observers already expected the ECB to leave rates unchanged. But with the possibility that the trade relationship between the U.S. and the EU could grow more contentious in the near term…and include a 15% baseline tariff rate on imports from across the pond as well as retaliatory tariffs imposed by the EU…officials were all too happy to take a “wait-and-see” approach to rate policy this time around.
“The environment remains exceptionally uncertain, especially because of trade disputes,” the ECB said in a statement.
Indeed, numerous economists now expect the ECB to take no further action on interest rates for the foreseeable future, not only out of deference to persistent tariff uncertainty but also because inflation has declined back to target.
“We are revising our forecasts and no longer expect a final cut of the ECB deposit rate to 1.75% at the September meeting,” Commerzbank economist Jörg Krämer said. “Now expect an unchanged deposit rate of 2.0% for the rest of this year and for 2026.”
That’s it for now; have a great weekend!
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