At the end of this week, the financial markets were hailing major victories. Small-cap stocks were the leaders, showing surprising upside growth and strength. In fact, the S&P 500 and national Nasdaq composite hit record highs on all three days. This remarkable growth came in the face of adversarial outside economic forces. This bond market rally comes in the wake of a very robust June payrolls report. It showed the creation of 147,000 new jobs, well above the anticipated 106,000.
We know that the economic landscape is shifting rapidly. The unemployment rate has recently fallen to 4.1%, increasing optimism about the labor market. And finally, factory orders ballooned. At the same time, services Purchasing Managers’ Indices (PMIs) increased above the important 50 signal line, indicating growth in the sector.
Here’s what happened this week as the semiconductor sector enjoyed a big win. This increase is partially due to encouraging signs that U.S./China relations are thawing somewhat on the issue of exporting chip design software. This calming of relations is potentially opening the door to new collaboration opportunities and trade, further boosting the industry’s optimistic outlook.
These are positive signs, but the Federal Reserve is still unwilling to change its monetary policy. The 10-year Treasury yield rose six basis points to 4.32%, reflecting market fears of a strong economy for a long time. That’s why we expect the Fed to hold pat—in part, for the simple reason that nominal growth is picking up. Uncertainties over tariffs will put upward pressure on consumer prices over the next several months.
Today’s surprising economic data, the strongest in four years, provides the Fed with all the cover they need to hold interest rate cuts in abeyance. It gives political cover as the Fed steers through what it sees as a summer squall. Most importantly, policymakers are averse to the risk that easing measures too soon would fuel a resurgence of inflation. They are concerned that anew increasing tariffs could push the Consumer Price Index (CPI) up further as fall rolls in.
Investors have largely cheered these moves. U.S. equities will continue making record highs, market observers warn. The “Big Beautiful Bill,” a significant fiscal initiative championed by former President Donald Trump, has cleared a major hurdle, further bolstering market optimism.