Trust Investment Management
U.S. large caps, represented by the S&P 500 index, reached new record highs in July. While there was downward pressure due to the looming tariff deadline, large caps managed to close out the month 2.24% higher. U.S. small caps and emerging markets were not far behind, and posted a gain of 1.73% and 1.95%, respectively. Developed international declined 1.40%. Fixed income returns were mixed as the yield curve steepened slightly due to continued tariff and inflation uncertainty.
The U.S. president has made a considerable number of trade deals with America’s trading partners including the European Union, Japan, and the United Kingdom. However, some of the largest trading partners have not yet reached a deal. Mexico and China received an extension and are continuing to negotiate. Even so, concerns about the potential negative effects of tariffs continue to haunt the markets.
The Fed left rates unchanged in July, as expected. There were two voting members that dissented from the decision not to cut rates, which was noteworthy. It is widely expected that the Fed will cut rates by 25 basis points at its next meeting in September. The target rate probability for a September rate cut is 83%, according to the CME Group’s FedWatch tool. Investors still expect two 25 basis point rate cuts by the end of this year.
The U.S. Bureau of Economic Analysis released the latest inflation figures at the end of July. From the same month one year ago, the personal consumption expenditures (PCE) price index for June increased 2.6%. Excluding food and energy, the core PCE price index increased 2.8% from one year ago. Inflation was higher than expected and remains above the Fed’s 2% target.
While higher inflation would suggest that the Fed may hold rates steady for longer, July’s nonfarm payroll report came in significantly lower than expected. The unemployment rate also rose to 4.2%. A deteriorating labor market should increase the odds that the Fed will begin cutting rates soon. Rate cuts that lower fed funds closer to the neutral rate are likely to be a tailwind to the markets, at least over a period of time.
