Investors were net sellers of fund assets (including those of conventional funds and ETFs) for the third week in four, withdrawing a net $18.0 billion for the LSEG Lipper fund-flows week ended Wednesday, July 12. Fund investors were net purchasers of taxable bond funds (+$3.4 billion) and equity funds (+$1.0 billion) while being net redeemers of money market funds (-$22.2 billion) and tax-exempt fixed income funds (-$136 million) for the week.
Market Wrap-Up
Despite a few days of handwringing about what appears to be a high likelihood the Federal Reserve Board will raise its key lending rate later this month, better-than-expected inflation data and sanguine views for the start of the Q2 earnings season pushed U.S. stock indices to 15-month highs, but in some cases, the returns for the week were still a bit stingy.
On the domestic equity side of the equation, the Russell 2000 (+3.23%) posted the strongest return of the broad-based U.S. indices, followed by the Nasdaq Composite (+0.92%) and the S&P 500 (+0.57%). The Dow Jones Industrial Average (+0.17%) was the relative laggard of the group. Overseas, the Xetra DAX Total Return Index (+2.82%) rose to the top of the leaderboard of the often-followed broad-based international indices, followed by the FTSE 100 (+1.84%) and the Nikkei 225 (+0.01%). Meanwhile, the Shanghai Composite (-0.08%) posted the largest decline for the flows week.
For the fund-flows week, the Bloomberg U.S. Aggregate Bond Index (+0.63%) outpaced the Morningstar LSTA U.S. Leveraged Loan Index (+0.06%) and the Bloomberg Municipal Bond Index (-0.15%). After witnessing a rise early in the flows week, the 10-year Treasury yield finished lower for the week, declining nine basis points (bps)—settling at 3.86%—while the two-year Treasury yield declined 22 bps to close out the flows week at 4.72%. The U.S. Treasury yield curve remained inverted, with the two- and 10-year Treasury yield spread (-86 bps) narrowing by 13 bps for the week. The two-month Treasury yield witnessed the largest rise in yields for the week, jumping 11 bps to 5.49%.
On Thursday, July 6, the Dow ended the day nearly 370 points lower after ADP private payroll data indicated that the U.S. economy created 497,000 new jobs in June, significantly higher than analysts’ expectations of 220,000—raising investors’ angst that the Fed will have more ammo to justify a July rate hike at its next Federal Open Market Committee (FOMC) meeting. The 10-year Treasury yield rose 10 bps on the day. Taking some of the sting out of ADP’s blowout reading, weekly new jobless claims from the week prior showed an uptick in jobless benefit claims, rising 12,000 to 248,000. Meanwhile, job openings shown in the May JOLTS report fell below the 10-million mark, perhaps indicating the U.S. labor market is beginning to cool. In other news, the June ISM service sector reading rose to 53.9, beating economists’ expectations of 51.3. Minutes released on Wednesday from the Fed’s June policy-setting meeting cast a pall over the market, cementing views that the Fed would raise its key lending rate in July and possibly one more time this year.
All three commonly followed broad-based U.S. indices finished lower on Friday, July 7, after the Department of Labor reported that the U.S. economy created 209,000 jobs in June—its smallest gain in more than two years—missing analysts’ forecasts of 240,000. And while the figure is showing that interest rate hikes are beginning to slow the labor market, the Fed is still facing the fact that inflation is significantly above its 2% bogey. Average hourly earnings rose 0.4% in June for a year-over-year rise of 4.4%, while the unemployment rate declined to 3.6% from May’s reading of 3.7%. According to the CME FedWatch tool, fed-fund futures traders pushed the probability of a 25-bps hike in July to 92.4%
The Dow, S&P 500, and Nasdaq experienced their first market rise in four on Monday, July 10, as investors anticipated the next inflation report might show signs of easing prices—perhaps lending to just one more rate hike this year rather than the expected two. Nonetheless, Fed policymakers confirmed their continued fight against inflation, with San Fransico Fed President Mary Daily stating a “couple” of additional rate hikes are likely needed this year and that the U.S. labor market remains “really strong.”
The Dow posted its best daily gain in a month, rising 317 points, on Tuesday, July 11, after Treasury yields witnessed declines as investors await the release of the June consumer-price index on Wednesday and investors’ thoughts turned to Q2 corporate earnings. The 10-year Treasury yield declined to 3.99% from the fund-flows week high of 4.06% witnessed on July 7.
On Wednesday, July 12, the S&P 500 and Nasdaq closed at 15-month highs after the release of the June CPI report showed U.S. consumer prices rose a modest 0.2% last month—coming in below analysts’ expectations of 0.3%—and perhaps taking some pressure off the Fed. The year-over-year rate declined to 3% from 4% in May—its smallest increase since March 2021. Core CPI—which excludes the volatile food and energy items—also improved with the annual increase coming in at 4.8% for June, declining from a 5.3% reading in May. In other news, the Fed’s Beige Book anecdotally showed slowing economic growth for May and June, with slowing growth expected to continue.
Exchange-Traded Equity Funds
Equity ETFs witnessed net inflows for the third week in a row, attracting a little more than $5.1 billion for the most recent fund-flows week. Authorized participants (APs) were net buyers of domestic equity ETFs (+$4.1 billion), injecting money also for the third consecutive week, while nondomestic equity ETFs witnessed net inflows for the second week running, taking in $1.0 billion this past week. Large-cap ETFs (+$3.8 billion) observed the largest net inflows of the equity ETF macro-groups for the fund-flows week, followed by sector-technology ETFs (+$1.5 billion) and international equity ETFs (+$1.0 billion). Meanwhile, the commodities heavy sector-other ETFs (-$876 million) suffered the largest net outflows, bettered by small-cap ETFs (-$776 million).
Invesco QQQ Trust 1 (QQQ, +$2.2 billion) and iShares Core S&P 500 ETF (IVV, +$1.9 billion) attracted the largest amounts of net new money of all individual equity ETFs. At the other end of the spectrum, SPDR S&P 500 ETF (NYSE:SPY) (SPY, -$2.6 billion) experienced the largest individual net redemptions and iShares Russell 2000 ETF (IWM, -$1.6 billion) suffered the second largest net redemptions of the week.
Exchange-Traded Fixed Income Funds
For the second week in a row, taxable fixed-income ETFs experienced net inflows, taking in $3.2 billion this week. APs were net purchasers of government-Treasury ETFs (+$3.4 billion), flexible ETFs (+$242 million), and international & global debt ETFs (+$125 million) while being net redeemers of corporate high-yield ETFs (-$499 billion) and corporate investment-grade debt ETFs (-$32 million).
iShares 20+ Year Treasury Bond (NASDAQ:TLT) ETF (TLT, +$1.8 billion), iShares 0-3 Month Treasury Bond ETF (SGOV, +$733 million), and iShares Core US Aggregate Bond ETF (AGG, +$596 million) attracted the largest amounts of net new money of all individual taxable fixed income ETFs. Meanwhile iShares iBoxx $ High Yield Corporate Bond ETF (HYG, -$945 million) and iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD, -$934 million) handed back the largest individual net redemptions for the week.
For the second consecutive week, municipal bond ETFs witnessed net outflows, redeeming $132 million this week. VanEck Long Muni ETF (MLN, +$30 million) witnessed the largest draw of net new money of the municipal bond ETFs, while iShares National Muni Bond ETF (MUB, -$127 million) experienced the largest net redemptions in the subgroup.
Conventional Equity Funds
Conventional fund (ex-ETF) investors were net sellers of equity funds for the seventy-fifth week in a row—redeeming $4.1 billion—with the macro-group posting a 1.41% market gain for the fund-flows week. Domestic equity funds—suffering net redemptions of slightly less than $3.7 billion—witnessed their twenty-eighth consecutive week of net outflows while posting a 1.31% market advance on average for the fund-flows week. Non-domestic equity funds—posting a 1.78% weekly market rise on average—observed their twenty-first week of net outflows in a row, handing back slightly more than $421 million this week.
On the domestic equity side, fund investors were net redeemers of large-cap funds (-$1.8 billion) and mid-cap funds (-$721 million). Investors on the nondomestic equity side were net redeemers of international equity funds (-$342 million) and global equity funds (-$80 million) for the week.
Conventional Fixed Income Funds
For the second week in a row, taxable bond funds (ex-ETFs) witnessed net inflows—attracting $169 million this past week—while posting a 0.63% market gain on average for the fund-flows week. The corporate investment-grade debt funds macro-group attracted the largest draw of net money for the week—taking in $723 million—followed by corporate high-yield funds (+$120 million) and government-mortgage funds (+$49 million). Balanced funds (-$340 million) suffered the largest net redemptions, bettered by international & global debt funds (-$191 million) and flexible funds (-$146 million).
The municipal bond funds group posted a 0.23% market decline on average during the fund-flows week (their second weekly market decline in three) and witnessed net outflows for the third straight week, handing back slightly less than $5 million this week. High-Yield Municipal Debt Funds (+$104 million) witnessed the largest net inflows of the macro-group, followed by General & Insured Municipal Debt Funds (+$58 million). Meanwhile, Short-Intermediate Municipal Debt Funds witnessed the largest net outflows, handing back $44 million.