Michael Reinking:

Hello, I'm Michael Reinking, senior market strategist at the New York Stock Exchange, and this is Market Storylines. Every week we are here to keep you up to date on the key trends and events driving global markets. With the passing of the trade deadline last week, we were hoping that things would quiet down, but staying true to form, the administration has kept investors on their toes. We are recording on Thursday afternoon, so let's dive into this week's Market Storylines.

We were last with you before Friday's employment report. The S&P 500 was hovering around unchanged for the week, helped by the strong Microsoft and Meta earnings, but there was some weakness beneath the surface with small and mid-cap indices under pressure as rate-cut expectations were pushing out following what was perceived as a hawkish-fed meeting. However, things turned upside down after Friday's data. The July numbers weren't actually too far off of estimates with 73,000 jobs added to the economy, and the unemployment rate ticking up to 4.2%.

However, there were massive negative revisions to the previous two months, totaling 258,000 jobs, leaving the job gains in those two months in the teens. The average number of jobs added to the economy over the last six months is 81,000 jobs per month, about half of the average in 2024, with some of that related to the shrinking workforce, which is due to the immigration policy. Those negative revisions drew into question the prevailing narrative that there was underlying resilience in the labor market. The data, along with mega-cap tech earnings that didn't meet the high bar set earlier in the week, sent the S&P 500 down over 1.5%, closing below its 20-day moving average for the first time since April, breaking one of the top 10 longest streaks on record. The index was down 2.5% for the week, while small and mid-cap indices closed down closer to 4%.

Treasury yields fell sharply with the two-year yield plummeting over 20 basis points as markets pulled forward the prospect of rate cuts again. The market response wasn't the only consequence of the data as President Trump pulled out his favorite line from his Apprentice days firing the commissioner of the BLS, suggesting the numbers were rigged. Later in the day, there was also a surprise early resignation by Fed Governor Adriana Kugler, whose term was up in January.

Coming out of the week, President Trump said he would have nominees for both positions by the end of this week. That clock is running out, but there has been some interesting developments, at least on the Fed side of things. The open seat at the Fed allows President Trump to nominate a new official to serve on the Fed's board. That person could be temporary, through the January term, or be the permanent replacement. Once that person is in place, they would be eligible to be the next Fed chair.

In an interview earlier this week, President Trump said there were four potential candidates he was considering for the Fed chair role, though he pulled Treasury Secretary Bessent from that pool at his request, which left the two Kevins, as he referred to them, Kevin Hassett, director of the Economic Council, and former Fed Governor Kevin Warsh, and presumably Fed Governor Christopher Waller who dissented at the last Fed meeting. Earlier today, Bloomberg reported that he has emerged as a frontrunner amidst Trump advisors, but is yet to meet with the president and is now the favorite on Polymarket to replace the Chairman. Over the last month, we have suggested he would be a very good option as he is respected within the institution and by investors and has been ahead of the curve during the most recent cycles.

Taking this conversation back to markets, coming out of the weekend, equities rebounded, recouping a good portion of Friday's losses on optimism that the Fed was going to embark upon an easing cycle with the probability of a September rate cut moving up to 90% and markets starting to price in two to three cuts by year-end. Tuesday markets opened higher but came under some pressure after the ISM services numbers came in below expectations with a whiff of stagflation as the underlying growth indicators moderated and prices increased.

However, there was rotation in the back half of the day with small and mid-cap indices catching a bit. Trade has remained very much part of the conversation and has driven the trading activity over the last two days. Last week, President Trump pulled forward his deadline for Russia to reach a deal with Ukraine and suggested there could be secondary sanctions on Russia or countries that buy their oil.

Yesterday, despite the Special Envoy meeting in Moscow, which supposedly went well, the White House announced an increase in tariffs on India to 50% from 25%. However, along with that announcement, there were reports that Apple, which had moved much of its production to that country, would be announcing an additional a hundred billion dollars investment in US manufacturing and would be exempt from those tariffs.

Apple is the third-largest component in the S&P 500 and a big underperforming year to date. The stock rallied sharply during the session. After the close, Tim Cook joined President Trump at the White House announcing partnerships with a number of companies to accelerate manufacturing in the US and help create an end-to-end silicone supply chain. During that press conference, President Trump said that there would be 100% tariffs on semiconductors manufactured overseas. That is, unless, like Apple, the companies are manufacturing or committed to manufacture in the US. There has been some speculation that this framework could be applied to the pharmaceutical sector as well.

It was a risk on move this morning with strength in semiconductors, strong trade data out of China, reports that President Trump would sign an executive order opening up 401k investments to crypto, private equity, and other alternatives, and there were also reports that President Trump and President Putin would meet next week. That opening strength was met quickly with selling pressure, and markets have accelerated to the downside in the afternoon as the White House has downplayed that potential meeting.

For the week, most major US indices are still up over 1%, recouping about half of last week's losses. However, markets are showing some signs of fatigue, which shouldn't be all that surprising given the recent rally and the fact that we're in a seasonal time period that tends to be difficult for markets. We were hoping for a summer reprieve this week, but that goes out the window, and next week there is key economic data including inflation data and retail sales.

Negotiations with Russia, India, Switzerland, and Taiwan will remain in focus. The China tariff pause deadline ends next week, and we're still waiting for an official extension after the last round of negotiations. Earnings do slow down a bit, though there are some late-cycle tech reports before we start to hear from the major retailers in the following week.

That's going to do it for this week. Thanks for spending some time with us. If you like today's episode, please tell a friend or leave a comment wherever you listen to your podcasts. Thanks for joining me. I'm Michael Reinking and I'll talk to you again next week.

Speaker 2:

That's our conversation for this week. Remember to rate, review, and subscribe wherever you listen and follow us on X at ICE House Podcast. From the New York Stock Exchange, we'll talk to you again next week inside the ICE House.

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