Broad equity markets continue to set new all-time highs irrespective of aggregate economic data that suggests economic growth is slowing. The labor market report for June implies the pace of hiring is slowing and the composition of job growth has firmed up in the public sector while economically sensitive manufacturing jobs contracted. The unemployment rate continues to inch higher due to substantive negative labor market data revisions for both April and May. 

In the wake of the lagging ISM manufacturing report the Atlanta Fed cut its second quarter GDP estimate to a 1.5% annual pace, down from its previous estimate of 1.7%. The economy is still growing, albeit at a slower pace. On the bright side, the consensus estimates of annual consumer price inflation of 3.1% in June is expected to be reported this week down from 3.3% in May.  The data may encourage the Fed to deliver its first reduction in borrowing costs sooner rather than later. At present, markets expect two rate cuts this year, with the first arriving in September. However, Fed officials suggested in June that they expected to cut interest rates only once this year.  Powell may elaborate upon the Fed's picture of the economy when he gives his twice-yearly policy update to Congress, starting today with an appearance in the Senate.

Many market participants remain concerned about the imbalanced and concentrated performance this year of mega-cap technology names versus economically and credit sensitive areas of the market such the Russell 2000.  For contextual purposes, the Russell 2000 is higher year to date by less than 1%, while the S&P 500 has risen by over 17%.  Over the long term, returns from large and small caps tend to be far more similar, and lower long-term Treasury yields of approximately 50 basis points since late April have not positively influenced small caps. Large cap technology names remain in favor because they are less sensitive to credit risk and have durable competitive advantages as well large market share in their respective corners.  As a result, institutions are investing in the equity stack where profits are robust versus the more economically sensitive and less predictable small cap ecosystem.  

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