Stocks Drift, Finish Slightly Lower
U.S. equities finished lower for a second session with financials taking the brunt of the losses following some trading revenue warnings from within the sector, while the Fed’s Beige Book noted some districts saw some slowing in growth.
Crude oil’s continued descent pressured the energy sector, and domestic economic data was less-than-stellar. Treasury yields lost ground and gold was higher, while the U.S. dollar was flat.
The Dow Jones Industrial Average declined 21 points (0.1%) to 21,009
The S&P 500 Index decreased 1 point (0.1%) to 2,412
The Nasdaq Composite moved 5 points (0.1%) lower to 6,199
In heavy volume, 1.5 billion shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq
WTI crude oil fell $1.34 to $48.32 per barrel and wholesale gasoline lost $0.02 to $1.60 per gallon
The Bloomberg gold spot price increased $5.57 to $1,268.66 per ounce
The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly flat at 97.09
Regional manufacturing growth slows, Fed report shows moderating growth
The Chicago Purchasing Managers Index slowed but remained at a level depicting expansion (above 50), after declining to 55.2 in May, from 58.3 in March, which was the highest level since January 2015, and versus the Bloomberg expectation of a decrease to 57.0.
Pending home sales fell 1.3% month-over-month in April, versus projections of a 0.5% increase, and following the downwardly revised 0.9% decline registered in March. Compared to last year, sales were 5.4% lower. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which fell more than expected in April.
The MBA Mortgage Application Index decreased 3.4% last week, following the previous week’s 4.4% gain. The drop came as a 5.6% fall in the Refinance Index was met with a 1.4% decline for the Purchase Index. The average 30-year mortgage rate remained at 4.17%.
The Federal Reserve’s Beige Book, a look at business activity across the nation used as a preparation tool for the Fed’s next two-day monetary policy meeting set to conclude on June 14th, was released in afternoon action. The report showed that the U.S. economy as a whole continued to grow at a “modest to moderate” pace, but the districts of Boston and Chicago noted slowing growth, while New York “indicated that activity had flattened out.” Meanwhile, the report indicated that “labor market conditions continued to tighten, with most districts citing shortages”, while prices overall “were little changed from the previous report, with most districts reporting modest increases.”
Expectations are elevated that the Fed will raise interest rates following its June meeting, though the frequency of further hikes this year is in question as the Central Bank looks to begin the process of shrinking its bloated balance sheet, a move that the transition from quantitative easing (QE) to quantitative tightening (QT) begs the question whether we are heading into another period of heightened volatility. Remember, stocks tend to fare well during rate hike cycles, the unprecedented nature of this tightening cycle suggests bouts of volatility are likely
Treasuries finished modestly higher, as the yields on the 2-year and 10-year notes, along with the 30-year bond, dipped by 1 basis point to 1.28%, 2.20% and 2.87%, respectively.
Tomorrow’s economic calendar will heat up with a plethora of key reports for the markets to digest ahead of Friday’s labor report, beginning with ADP’s private sector payroll release and weekly initial jobless claims. However, the following releases of the ISM Manufacturing Index and May auto sales figures are likely to garner the most scrutiny. ISM is expected to show manufacturing activity is expected to slow slightly to 54.6 in May from 54.8 April but remain solidly in expansion territory a depicted by a reading above 50. According the FactSet, adjusted auto sales are projected to post another y/y decline, likely preserving concerns about the divergence between hard and soft data.
Europe and Asia mixed in the face of heightened political uncertainty
European equities finished mixed amid elevated political uncertainty in the region. Recent polls suggested U.K. Prime Minister Theresa May’s Conservative Party could lose seats in Parliament and may not win an overall majority in next week’s election. This came against the backdrop of the nation’s ongoing Brexit negotiations to foster some increased political uncertainty, while elections loom in Italy and Germany later this year. The British pound overcame early losses and was higher versus the U.S. dollar.
In economic news, the Eurozone consumer price inflation estimates for May came in cooler than expected, while the region’s unemployment rate unexpectedly dipped to 9.3%. Also, Germany’s unemployment change declined by a slightly smaller amount than anticipated and the nation’s retail sales surprisingly slipped. The euro was higher versus the greenback and bond yields in the region finished mixed. Healthcare stocks gained solid ground, though the oil & gas sector came under pressure as crude oil prices extended losses. Basic materials were lower despite some relatively upbeat Chinese manufacturing and services data, while financials were hampered by a flare-up in Italian banking concerns and warnings about trading revenues out of the U.S. banking sector.
Stocks in Asia finished mixed amid lingering political uncertainty in the U.S. and Europe, while the markets digested some divergent reads on economic activity in the region. Japanese equities dipped slightly, with the yen choppy after paring gains late in the session, while a report showed the nation’s industrial production rebounded solidly in April, but at a pace that was just shy of expectations. Stocks in mainland China advanced, but those traded in Hong Kong declined, as traders grappled with a recent credit rating downgrade of the nation, festering regulatory crackdown concerns, and the aforementioned political uncertainty.
Also, the markets digested China’s official May business activity reports, which showed growth in manufacturing output held steady, slightly above forecasts, while its expansion in its key services sector accelerated slightly. Meanwhile, markets in Australia and South Korea gained modest ground, while securities in India finished flat ahead of the release of its Q1 GDP report. After the markets closed, India reported that its Q1 GDP growth slowed to a 6.1% y/y pace of expansion, from a 7.0% pace in Q4, and compared to the projected acceleration to a rise of 7.1%.