Monthly Archives: June 2018

Market Insights 6/29/2018

U.S. stocks strung a second-straight session of gains to close out the final trading day of the first-half of the year with the recently pressured technology and healthcare sectors rebounding.

Treasury yields ticked higher and the U.S. dollar fell amid rallies for the euro and British pound.

The Markets…

The Dow Jones Industrial Average (DJIA) gained 55 points (0.2%) to 24,271

The S&P 500 Index added 2 points (0.1%) to 2,718

The Nasdaq Composite advanced 7 points (0.1%) to 7,510

In moderately-heavy volume, 982 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.70 to $74.15 per barrel and wholesale gasoline was up $0.05 at $2.17 per gallon

The Bloomberg gold spot price traded $4.28 higher to $1,252.53 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% lower at 94.60

Markets were lower for the week, as the DJIA declined 1.3%, the S&P 500 Index was also 1.3% lower and the Nasdaq Composite fell 2.4%

Personal income and spending report mixed, consumer sentiment dips more than expected

Personal income rose 0.4% month-over-month in May, matching the Bloomberg forecast, and versus April’s downwardly revised 0.2% increase. Personal spending grew 0.2%, below expectations of a 0.4% gain, and versus April’s downwardly revised 0.5% increase. The May savings rate as a percentage of disposable income was 3.2%. Excluding food and energy, the PCE Core Index was 0.2% higher m/m, matching expectations and the prior month’s unrevised gain. The index was 2.0% higher y/y, above estimates of a 1.9% gain and April’s unrevised 1.8% rise.

The final June University of Michigan Consumer Sentiment Index was adjusted lower to 98.2, from the preliminary 99.3 figure, versus forecasts to dip to 99.0. The index was slightly above May’s 98.0 level. The downward revision came as the expectations and current conditions components of the report were both adjusted lower, with the former down and the latter up versus May’s figures. The 1-year inflation forecast rose m/m to 3.0% from 2.8% and the 5-10 year outlook ticked higher to 2.6% from 2.5%.

Treasuries finished lower, with the yields on the 2-year and 10-year notes rising 2 basis points to 2.53% and 2.86%, respectively, and the yield on the 30-year bond gaining 3 bps to 2.99%.

As central banks move toward tighter monetary policy, global liquidity is declining for the first time in nearly a decade, leading to higher volatility, especially in the riskier segments of the fixed income market. The yield curve will likely continue to flatten and we expect one to two rate hikes by the Federal Reserve in the second half of the year, but short-term rates will likely rise more than long-term interest rates.

We feel, despite a recent pullback in U.S. stocks, and a sharper one in international markets—reflecting both trade worries and the recent strength in the U.S. dollar—we don’t believe it marks the beginning of a more severe correction. Risks of a prolonged trade dispute have risen but it’s too soon to declare war; while the possibility of a positive resolution that would likely be a tailwind for equities. For now, a healthy U.S. economy is an offset to those growing worries. Threats to the current bull market have risen, and they include this being a midterm election year—which have historically been accompanied by larger-than-average drawdowns. We continue to espouse discipline and diversification; but for now it’s in the context of an ongoing bull market.

A fully-loaded economic calendar awaits the markets next week, which will be shortened by the Independence Day holiday. The ISM Manufacturing and non-Manufacturing Indexes will be joined by June auto sales figures, the trade balance and the minutes from the Fed’s June meeting that delivered another rate hike. However, the week will culminate with Friday’s non-farm payroll report, with an eye on the inflation component of wage growth likely garnering the most scrutiny amid the current economic and monetary policy backdrops.

Europe rallies on EU migration deal

European equities traded broadly higher, with technology issues leading the way despite lingering global trade concerns that briefly flared up amid reports that U.S. President Donald Trump wants to pull out of the World Trade Organization (WTO), but Treasury Secretary Mnuchin called the reports an “exaggeration.” Sentiment in the region got a boost from eased geopolitical concerns on the news that the European Union (EU) has reached a deal on migration.

In economic news, German retail sales fell more than expected but the nation’s unemployment change declined more than anticipated, and U.K. Q1 quarter-over-quarter GDP growth was surprisingly revised higher, while a read on Eurozone consumer price inflation rose to 2.0% as expected.

The euro and British pound rallied versus the U.S. dollar following the data and the EU migration deal, but bond yields in the region were mostly lower. The data appeared to preserve the recent uptick in expectations that the European Central Bank (ECB) is nearing the path to monetary policy normalization and the Bank of England (BoE) may be getting closer to a rate hike.

The U.K. FTSE 100 Index was up 0.3%, France’s CAC-40 Index and Italy’s FTSE MIB Index increased 0.9%, Germany’s DAX Index rose 1.1%, Spain’s IBEX 35 Index gained 0.4%, and Switzerland’s Swiss Market Index rallied 1.7%.

Stocks in Asia finished mostly higher to close out a rough week and the quarter, as yesterday the U.S. markets overcame early pressure and finished higher. Trade concerns that have been at the heart of the recent slide in the global markets appeared relatively calm. Japanese equities advanced with the yen extending yesterday’s losses, while a read on consumer price inflation in Tokyo for this month—a leading indicator for inflation—came in hotter than expected and a separate report showed the country’s jobless rate fell to the lowest in a quarter century, per Bloomberg.

Stocks trading in both mainland China and in Hong Kong rallied after the former hit bear market territory earlier this week and comments suggested the People’s Bank of China may be set to loosen monetary policy to combat the recent volatility fostered some optimism. The rebound in China came as the nation is set to deliver some key reads on June manufacturing and services sector activity over the weekend.

South Korean equities gained ground, aided by a stronger-than-expected read on the country’s industrial production for May. Indian shares advanced as the U.S. dollar came under pressure. Emerging markets have seen some heightened volatility as of late on the recent rally in the U.S. dollar and exacerbated by inflation concerns amid the recent jump in energy prices.

Market Insights 6/28/2018

U.S. stocks reversed course mid-day and moved higher, strengthening into the close. Healthcare issues are seeing pressure amid news that Amazon agreed to acquire online pharmacy PillPack.

Treasury yields are moved higher and the U.S. dollar is giving back some of a two-day rally, while Q1 GDP was unexpectedly revised lower.

The Markets…..

The Jones Industrial Average moved higher by 98.5 pts of .41%.

The S&P 500 Index gained 16.6 pts or .62%

The Nasdaq Composite was the winner on the day adding 58.6 pts or .79% by the days close

WTI crude oil gained 52 cents a barrel to close at $73.28

Gold declined $6.30 to $1,249.80 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—is dipping 0.1% to 95.22

Final look at Q1 GDP unexpectedly revised lower, jobless claims rise

The final look (of three) at Q1 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 2.0%, adjusted down from the 2.2% expansion posted in the first revision, where it was expected to remain. Q4 GDP expanded by an unrevised 2.9% rate. Personal consumption was revised to a 0.9% gain, from the previously-estimated 1.0% rise, where it was expected to remain, and compared to the unrevised 4.0% increase posted in Q4.

On inflation, the GDP Price Index was adjusted to a 2.2% rise, compared to estimates of an unrevised 1.9% gain, while the core PCE Index, which excludes food and energy, was unrevised at a 2.3% increase, matching estimates.

Weekly initial jobless claims rose by 9,000 to 227,000, versus estimates calling for 220,000, with the prior week’s figure unrevised at 218,000. The four-week moving average increased by 1,000 to 222,000, while continuing claims fell by 21,000 to 1,705,000, south of estimates of 1,717,000.

Treasuries dipped, with the yields on the 2-year and 10-year notes ticking 1 basis point (bp) higher to 2.51% and 2.84%, respectively, though the yield on the 30-year bond was mostly flat at 2.97%.

Elevated trade tensions between the U.S., Europe and China remain a source of market attention and volatility that has pressured stocks as of late as discussed in our article, Trade Fears Weigh on Stocks. However, trade concerns, which have been exacerbated by reports that the U.S. is looking to restrict Chinese investment in the U.S., appear to be easing following yesterday’s news that the U.S. will rely on the Committee on Foreign Investment in the U.S. (CFIUS) to police the foreign acquisition of intellectual property, or sensitive domestic technologies. The move appeared to be less confrontational, notably toward China, than some had feared.

Tomorrow, the U.S. economic calendar will begin with personal income and spending for May, income and spending both are predicted to increase 0.4% m/m, after rising by 0.3% and 0.6%, respectively in April. After the opening bell we’ll receive the Chicago Purchasing Manager Survey, with economists anticipating a reading of 60.0 for June after registering 62.7 in the month prior.

The final University of Michigan Consumer Sentiment Index for June, anticipated to tick lower to 99.0 from the preliminary print of 99.3, but up from May’s final read of 98.0.

Europe and Asia mostly lower as trade concerns and tech weakness weigh

European equities finished lower following yesterday’s upside reversal, with the technology sector seeing some renewed pressure as global trade worries continue to linger. The euro traded higher as a read on economic confidence declined by a smaller amount than expected and the U.S. dollar dipped after a two-day rally.

Energy issues gave back some recent gains as crude oil prices were mixed after a run as of late to multi-year highs. The markets also continued to grapple with festering political uncertainty in Germany and remaining Brexit ambiguity. The British pound edged lower versus the greenback and bond yields in the region were mostly lower.

Stocks in Asia finished mostly to the downside on the heels of the choppy day in the U.S. yesterday that saw the markets reverse gains late in the session and close lower, while global trade concerns continued to fester and drain conviction.

Mainland Chinese shares fell and entered bear market territory earlier this week, while stocks trading in Hong Kong rose, aided by strength in energy issues as crude oil prices continued a run to multi-year highs yesterday. South Korean securities dropped, with technology issues seeing some pressure, while Indian equities also traded lower.

Japanese stocks finished flat, despite a larger-than-expected drop in the nation’s retail sales, on the heels of yesterday’s decline in the yen, while the rally in the energy sector helped lift Australian shares to the upside.

Random Thoughts

Over the past few weeks, one could conclude that investors had previously dismissed the prospect of the trade skirmish expanding into a full-blown war, as they were content in rotating, rather than retreating.

In other words, they were happy to buy into the more domestically focused small-cap arena than retreat from equities altogether.

Yet, on Monday, investors began to take evasive action by lightening up on a variety of sizes, sectors, sub-industries and regions. Indeed, U.S. large-, mid- and small-cap stocks, along with developed international and emerging markets, each fell by more than 1% on the day.

Also, nine of the S&P 1500’s 11 sectors and 85% of its 145 sub-industries fell in price. Though understandably unnerving, we advise clients to ride out this volatility, which has typically increased in intensity approaching midterm elections.

Market Insights 6/26/2018

The U.S. equity markets were able to rebound from yesterday’s selloff to post modest gains, but continued trade angst kept any recovery muted.

Technology stocks, which fueled the rout yesterday, led the way, while energy issues got a boost from a rally in crude oil prices on a call from the U.S. to its allies to boycott oil imports from Iran.

Treasury yields were little changed and the U.S. dollar gained ground amid a mixed economic calendar that showed Consumer Confidence and home prices fell short of expectations, but regional manufacturing surprisingly rose.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 30 points (0.1%) to 24,283

The S&P 500 Index increased 6 points (0.2%) to 2,723

The Nasdaq Composite gained 30 points (0.4%) to 7,562

In moderate volume, 854 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil jumped $2.45 to $70.53 per barrel and wholesale gasoline was up $0.03 at $2.06 per gallon

The Bloomberg gold spot price traded $6.92 lower to $1,258.72 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.5% to 94.71

Consumer Confidence slips

The Consumer Confidence Index declined to 126.4 in June, from May’s upwardly-revised 128.8, and versus the Bloomberg estimate of 128.0. The Present Situation Index was little changed but the Expectations Index of business conditions for the next six months declined. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—decreased to 25.1 from the 26.5 level posted in May.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 6.6% year-over-year gain in home prices in April, versus forecasts of a 6.8% rise. Month-over-month (m/m), home prices were up 0.2% on a seasonally adjusted basis for April, below expectations of a 0.4% gain.

The Richmond Fed Manufacturing Activity Index unexpectedly moved further into a level depicting expansion (a reading above zero), rising to 20 in June from 16.0 in May, versus estimates calling for a dip to 15.0.

Treasuries were little changed, as the yields on the 2-year and 10-year notes, along with the 30-year bond, were flat at 2.53%, 2.88% and 3.03%, respectively.

Treasury yields paused and the U.S. dollar gained some modest ground in the wake of yesterday’s slide for the global stock markets amid the elevated trade tensions between the U.S., Europe and China.

The markets also continue to grapple with the Fed’s move to gradually tighten monetary policy, while central banks in Europe look to be preparing to get on the path to policy normalization. Political uncertainty in Europe remained heightened and the synchronized global growth story continues to garner some scrutiny, with solid U.S. economic growth being countered by signs of softness in Europe. Crude oil prices regained some upward momentum, bolstered by reports that the U.S. is urging allies to cease all imports of Iranian oil by November

Despite a recent pullback in U.S. stocks, and a sharper one in international markets—reflecting both trade worries and the recent strength in the U.S. dollar—we don’t believe it marks the beginning of a more severe correction.

Risks of a prolonged trade dispute have risen but it’s too soon to declare war; while the possibility of a positive resolution that would likely be a tailwind for equities.

For now, a healthy U.S. economy is an offset to those growing worries. Threats to the current bull market have risen, and they include this being a midterm election year—which have historically been accompanied by larger-than-average pullbacks. We continue to espouse discipline and diversification; but for now it’s in the context of an ongoing bull market.

More housing data will grace tomorrow’s economic calendar, with pending home sales predicted to show the pipeline of existing home sales rose 0.5% m/m during May, as well as the release of MBA Mortgage Applications. Preliminary durable goods orders for May will also be released, with economists anticipating a 1.0% m/m decline for the headline figure, while orders ex-transportation and non-defense capital goods excluding aircraft are both anticipated to increase 0.5% m/m. Other reports on tap include the advance goods trade balance and wholesale inventories.

Europe mixed after yesterday’s drop, Asia lower

European equities finished mixed, with technology issues rebounding from yesterday’s fall that led a global stock market selloff, while the energy sector advanced as crude oil prices turned decisively higher. However, utilities led to the upside and the markets remained skittish amid escalated trade tensions, with the U.S. deploying tariffs on China and Europe and fostering retaliation from the two nations, which continued to be the main source of volatility.

The markets got some support from the euro and British pound moving lower versus the U.S. dollar, which recovered from yesterday’s dip, while bond yields in the region finished mostly higher.

Stocks in Asia finished mostly lower, with the global market remaining hampered by the escalated trade tensions between the U.S., China and Europe. Mainland Chinese stocks and those listed in Hong Kong declined, with the former ending the day in bear market territory. Equities in Australia and South Korea traded lower, while markets in India ticked higher, possibly aided by yesterday’s dip in the U.S. dollar, which has rallied as of late to pressure emerging markets.

Stocks in Japan finished flat, battling back from yesterday’s drop which had carried over early in the session, with the yen modestly trimming some of Monday’s gain, while banking and utility stocks led the late-day resiliency.

Comments From the CIO

The S&P 500 is only two months away from becoming the longest bull market since WWII, provided it sets a new all-time high before declining 20% from the January 26, 2018 peak.

We believe the 500 will record this milestone sometime this summer, but it won’t be easy. Headwinds abound from slowing global economic and EPS growth projections to intensifying trade tensions and increasing inflation expectations, all within a rising rate environment.

Add to this the traditional uncertainty associated with mid-term elections, which saw the average daily price volatility for the S&P 500 rising by 34% in this third quarter than in all non-mid-term election years since 1945.

One reason is that following these elections, the party controlling the executive branch typically saw their representation in the House shrink by an average 22 seats and witnessed a four-seat reduction in the Senate, both of which would threaten the Republican’s control of Congress.

What’s more, even though this economic expansion is more than twice the duration of average expansions since 1900, many wonder if it will become overheated and require the Fed to raise rates longer and more aggressively than currently predicted. Despite holding up quite well in the face of heightened geo-political turmoil, investors wonder if this bull market will start to show its age during the remainder of 2018. Our baseline forecast assumes solid GDP growth, a double-digit rise in EPS and two more rate hikes, that will translate into mid-single-digit stock-price appreciation for the S&P 500.

We think equities remain the asset class of choice. However, after a stellar performance in 2017, we continue to think that 2018 will end up recording a single-digit price rise.

We therefore recommend that investors don’t try to time the market’s every move and maintain the equity exposure that is appropriate for their time horizon and risk tolerance.

U.S. GDP and EPS growth estimates remain solid, as a result of the late-2017 tax cuts and organic economic growth projections. The biggest uncertainty continues to be the simmering global trade tensions that we currently think will not morph into a full-blown trade war.

However, we see volatility remaining elevated, since this year’s midterm election offers the traditional amount of uncertainty. Yet we still see the correction that started on January 26 coming to a conclusion this quarter, as we are encouraged by the broadening of equity market participation with small caps and the Nasdaq hitting new all-time highs.

Market Insights 6/22/2018

U.S. stocks closed the regular trading session mostly higher with the energy sector rallying amid a surge in crude oil prices following an agreement to modestly increase production among OPEC and non-OPEC members.

Tech stocks underperformed as trade concerns persisted and open source solutions company Red Hat issued Q2 guidance that was below the Street’s expectations.

Treasury yields were mostly flat, gold ticked higher and the U.S. dollar trimmed a recent run.

The Markets…

The Dow Jones Industrial Average (DJIA) increased 119 points (0.5%) to 24,581

The S&P 500 Index advanced 5 points (0.2%) to 2,755

The Nasdaq Composite dipped 20 points (0.3%) to 7,693

In very heavy volume, due to the rebalancing of FTSE Russell’s U.S. indexes, 2.2 billion shares were traded on the NYSE and 3.4 billion shares changed hands on the Nasdaq

WTI crude oil surged $3.04 to $68.58 per barrel and wholesale gasoline was up $0.06 at $2.07 per gallon

The Bloomberg gold spot price traded $2.96 higher to $1,270.15 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% lower at 94.53

Markets were lower for the week, as the DJIA fell 2.0%, the S&P 500 Index was 0.9% lower and the Nasdaq Composite declined 0.7%

June business activity slows but shows continued growth

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output slowed more than expected, falling to 54.6 in June from May’s 56.4 figure, and compared to the Bloomberg estimate calling for a 56.1 figure. The preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector slowed slightly this month, dipping to 56.5 from May’s 56.8 figure, matching forecasts. However, readings above 50 for both indexes denote expansion.

Treasuries were nearly unchanged, with the yield on the 2-year note ticking 1 basis point (bp) higher to 2.55%, while the yields on the 10-year note and the 30-year bond were flat at 2.90% and 3.04%, respectively.

The U.S. dollar trimmed a recent run, while the Dow was able to snap a string of losses. The markets are grappling with global monetary policy that looks to be tilting toward the tightening side, and the synchronized global growth story that has come into question given the softness seen in Europe and the uneasiness regarding the potential impact on emerging markets of the persistent rise in the U.S. dollar.

Crude oil prices rallied following today’s conclusion of an OPEC meeting, with members and their non-OPEC partners agreeing to increase production, but reports suggested the rise may not be enough to tamp down oil prices that have rallied as of late.

Europe mostly higher, Asia mixed

European equities finished mostly higher, with energy stocks leading the way as crude oil prices rose solidly amid reports OPEC and non-OPEC members reached a production increase agreement following today’s meeting. However, headlines suggested the potential increase may not be enough to stem the recent rally in crude oil prices. Banking stocks were also higher, with Italian banks rebounding from yesterday’s drop that came amid the lingering political uncertainty, aided by comments from an Italian lawmaker that appeared to cool concerns that the government is looking to leave the single currency union.

Automakers remained hamstrung by the festering global trade concerns, weighing on the German markets, as U.S. President Donald Trump threatened tariffs on EU automakers. U.K. Brexit concerns were also in focus. Economic data in the region was relatively upbeat, headlined by Markit’s Eurozone Composite PMI Index—a gauge of business activity in the both the manufacturing and services sectors—that showed growth unexpectedly accelerated. The euro and British pound were higher on the data and as the U.S. dollar trimmed a run as of late, while bond yields in the region finished mixed.

Stocks in Asia finished mixed amid the continued global trade uneasiness that has hampered global equities and the markets remained cautious ahead of today’s expected OPEC meeting decision on production increases. However, Chinese stocks found some support from news that brokers must seek government approval before liquidating shares pledged as collateral for loans, per Bloomberg. Also, a reprieve from the recent rally in the U.S. dollar likely helped emerging markets recover.

Shares trading in mainland China and in Hong Kong gained ground, while equities in South Korea and India also finished higher. Australian securities dipped and Japanese stocks fell amid the festering trade uneasiness and as the yen resumed an upward move, with Japan reporting that May consumer price inflation came in a bit hotter than expected y/y for the headline rate.

Stocks lower on the week as trade tensions remain escalated

Stocks finished lower on the week, with global trade uneasiness festering after President Donald Trump offered more tariff threats against China after the two nations traded tariff jabs in the week prior and China vowed retaliation. Signs of tightening financial conditions also likely weighed on conviction, with the Fed remaining on a gradual rate hike path and the European Central Bank signaling it is close to getting on the path to policy normalization last week, which was followed by this week’s hawkish takeaway from the Bank of England’s monetary policy decision.

Treasury yields continued to be choppy, with the 10-year note remaining below the 3.00% mark, while the U.S. dollar dipped late in the week after a recent run that has added to volatility, notably in the emerging markets. Most major sectors finished lower, though the energy sector moved higher after the OPEC meeting delivered a production increase that appeared to fail to calm concerns in the wake of the recent surge in crude oil prices.

Next week, the economic calendar will be robust, courtesy of releases of new home sales, Consumer Confidence, preliminary durable goods orders, the final look (of three) at Q1 GDP, personal income and spending, the Chicago Purchasing Managers Index, and the final University of Michigan Consumer Sentiment Index.

Random Thoughts

As trade policy heats up and dominates the headlines, a trade war is getting too close to reality for the comfort of many investors.

Volatility has increased as confidence wears thin among investors. With limited news flow from corporations as we get into the heart of summer, we believe the unusual increase in volatility is likely to continue at least until earnings are released for the second quarter in mid-July.

FedEx, an early reporter given its off-cycle quarter that ended in May, voiced concern about the current trade situation on its earnings call. CEO Fred Smith said, “FedEx supports lowering trade barriers for our customers, not raising them.” Despite that, the company reiterated expectations for U.S. GDP growth of 2.9% in 2018 and 2.7% in 2019. Global GDP growth was also reiterated.

Like a well-seasoned CEO, we believe investors will be better served with a long-term focus while trade policies and volatility are ironed out.

Market Insights 6/21/2018

U.S. stocks finished the trading session lower amid lingering uneasiness in regard to global trade, monetary policy and European political issues. A larger-than-expected decline in regional manufacturing activity added to the somber sentiment, though additional reads from the economic docket showed weekly jobless claims declined and leading indicators continued to rise.

Treasuries advanced and the U.S. dollar reversed to the downside in the wake of the data and as the Bank of England’s monetary policy decision sounded a bit of a hawkish tone.

Crude oil prices declined ahead of this week’s potential OPEC production adjustment and gold dipped.

The Markets…

The Dow Jones Industrial Average declined 196 points (0.8%) to 24,462

The S&P 500 Index lost 18 points (0.6%) to 2,750

The Nasdaq Composite fell 69 points (0.9%) to 7,713

In moderately-heavy volume, 791 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil traded $0.17 lower to $65.54 per barrel and wholesale gasoline was down $0.01 at $2.01 per gallon

The Bloomberg gold spot price ticked $0.36 lower to $1,267.50 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% lower at 94.81

Leading Indicators miss but continue to grow and regional manufacturing activity falls

The Conference Board’s Index of Leading Economic Indicators (LEI) for May rose 0.2% month-over-month, below the Bloomberg projection to match April’s unrevised 0.4% rise. The index has not seen a decline since May 2016. ISM new orders, the yield curve, and consumer expectations were positive, while average workweek, building permits and jobless claims were negative.

Weekly initial jobless claims declined by 3,000 to 218,000, versus estimates calling for 220,000, with the prior week’s figure revised higher by 3,000 to 221,000. The four-week moving average fell by 4,000 to 221,000, while continuing claims rose by 22,000 to 1,723,000, north of estimates of 1,710,000.

The Philly Fed Manufacturing Index in June fell more than expected but remained solidly in expansion territory (a reading above zero), dropping to 19.9 from 34.4 in May, compared to estimates of a decline to 29.0.

Treasuries were higher, with the yield on the 2-year note declining 3 basis points to 2.54% and the yields on the 10-year note and the 30-year bond decreasing 4 bps to 2.90% and 3.04%, respectively.

Treasury yields and the U.S. dollar turned lower in the wake of the regional manufacturing data and a hawkish takeaway from the Bank of England’s (BoE) monetary policy decision, while the markets continued to grapple with elevated global trade uncertainty. Also, European political turmoil remains, while the Fed looks poised to continue to gradually tighten policy, as the European Central Bank and BoE appear to be tilting toward getting close to getting on the path to policy normalization. Meanwhile, the U.S. economic picture remains solid, but the synchronized global growth story is being tested by signs of softness in Europe and the impact of the persistent run in the U.S. dollar on emerging markets.

U.S. stocks have moved toward the top of the recent range but volatility is likely to rise at times during the summer as investors deal with various global geopolitical headwinds. Further strength in the U.S. dollar would likely exacerbate the volatility—particularly within emerging markets. But limited signs of pending recession risk—at least in the United States—should keep the path of least resistance for the stock market higher. That said, patience and discipline are more important than ever in the face of sometimes ominous-sounding headlines. Nearly everyone agrees stronger economic growth is a good thing, but it’s also bringing tighter monetary policy, which has implications for servicing the rising burden of debt.

Europe mostly lower and Asia mixed as uncertainties persist

European equities finished lower, with intensified global trade concerns weighing on the auto sector, while the British pound gained solid ground on the U.S. dollar after the Bank of England (BoE) delivered its monetary policy decision.

The BoE held its policy stance unchanged as expected, but an unexpected shift to a 6-3 split vote, with the latter gaining one more member calling for an immediate rate hike, fostering a hawkish takeaway, along with a change in the central bank’s guidance on when they will consider trimming its asset purchases.

Italian banking concerns flared back up amid lingering political uncertainty, to apply some pressure, while the markets awaited this week’s conclusion of the OPEC meeting, which could bring a production change. The euro turned higher versus the greenback following some disappointing U.S. data and bond yields in the region finished mixed. In other economic news, the Swiss National Bank held its monetary policy stance unchanged as expected.

Stocks in Asia finished mixed, with the host of global uncertainties festering, notably the escalated trade tensions between China and the U.S., while the markets continued to grapple with monetary policy and political ambiguities, along with the potential looming OPEC production changes.

Shares trading in mainland China and in Hong Kong fell, while South Korean equities declined and Indian securities dipped. Emerging markets have struggled as of late, exacerbated by the grind higher in the U.S. dollar, and the yen continued to give up a recent upswing to help Japanese equities move higher and Australian shares gained ground amid a broad-based advance among the country’s major market sectors.

Market Insights 6/19/2018

U.S. stocks finished off their lows, but still lower on the day, amid some broad-based global equity pressure as global trade worries continued after the Trump administration threatened further tariffs on Chinese imports.

Treasuries advanced amid the decline in equities and the U.S. dollar also rose. Crude oil prices fell, ahead of this week’s meeting of OPEC members and gold traded lower.

The Markets…

The Dow Jones Industrial Average declined 287 points (1.2%) to 24,700

The S&P 500 Index lost 11 points (0.4%) to 2,762

The Nasdaq Composite dipped 21 points (0.3%) to 7,726

In moderately-heavy volume, 981 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil traded $0.78 lower to $65.07 per barrel and wholesale gasoline was down $0.01 at $2.04 per gallon

The Bloomberg gold spot price ticked $3.14 lower to $1,275.18 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—traded 0.3% higher to 95.05

May housing construction activity mixed

Housing starts for May rose 5.0% month-over-month to an annual pace of 1,350,000 units, above the Bloomberg forecast of a 1,311,000 unit rate. April starts were revised slightly lower to an annual pace of 1,286,000. Construction for single and multi-family units were solidly higher compared to the prior month and are up noticeably y/y.

Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, fell 4.6% m/m in May to an annual rate of 1,301,000, versus expectations of a 1,350,000 pace, and compared to April’s upwardly revised 1,364,000 rate. Permits for single and multi-family unit structures both declined m/m but both remain higher y/y.

Today’s housing starts data was likely welcomed news as tight inventories have constrained sales, but housing affordability remains hampered by the continued grind higher in home prices and could face further pressure if interest rates accelerate as the Fed moves further down the path to monetary policy normalization.

Treasuries were higher, with the yield on the 2-year note declining 1 basis point (bp) to 2.54%, the yield on the 10-year note dipping 3 bps to 2.89% and the 30-year bond rate decreasing 2 bps to 3.02%.

Treasury yields pulled back from a recent resurgence and the global stock markets were under some pressure, while the U.S. dollar gained solid ground. Trade tensions between the U.S. and China continue to ramp up, with the former threatening further tariffs after the two nations traded tariff jabs last week and the latter warning of more retaliation. The markets also remained jittery as European political uncertainty lingers and monetary policy appears to be poised to continue to tighten.

Tomorrow, the U.S. economic calendar will deliver more housing data the form of May existing home sales, anticipated to rise 1.1% m/m to an annual rate of 5.52 million units, as well as weekly mortgage applications, which have been choppy as of late amid the large swings in mortgage rates in the past month. Additionally, we’ll receive the current account balance for Q1, with the deficit expected to have widened to $129.0 billion from the previous $128.2 billion shortfall in Q4.

Europe extends yesterday’s decline, Asia broadly lower as trade concerns persist

European equities added to yesterday’s broad-based decline, even as the euro and British pound saw pressure versus the U.S. dollar and bond yields fell after European Central Bank President Mario Draghi noted that the central bank will take time to deploy rate hikes.

The global markets also continued to be on edge as trade war concerns continue to ramp up as the U.S. threatened more tariffs on Chinese imports even after the two countries traded tariff jabs last week. Moreover, political concerns festered in Germany and Brexit uncertainty lingered, while the Bank of England is expected to hold its monetary policy meeting later this week.

Stocks in Asia saw widespread pressure, with the trade spat between China and the U.S. escalating to exacerbate global market jitters as the U.S. threatened more tariffs and China warned that it will retaliate.

Mainland China and Hong Kong dropped, with the markets returning to action following yesterday’s holiday break that came as the global markets slipped on the heels of last week’s tariff jabs between the U.S. and China. Japanese equities traded well to the downside, with the yen rallying amid the heightened trade concerns.

Australian securities finished flat, while stocks trading in South Korea and India declined.

Market Insights 6/18/2018

U.S. stocks traded mostly lower to begin the week with global equities finding broad based pressure as investors continued to contemplate lingering Sino-American trade concerns.

Crude oil prices traded higher ahead of an OPEC meeting later this week, Treasury yields and the U.S. dollar were nearly unchanged and gold dipped.

The Markets….

The Dow Jones Industrial Average (DJIA) declined 103 points (0.4%) to 24,988

The S&P 500 Index lost 6 points (0.2%) to 2,774

The Nasdaq Composite added 1 point to 7,747

In moderate volume, 859 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil traded $0.73 higher to $65.79 per barrel and wholesale gasoline was up $0.03 at $2.05 per gallon

The Bloomberg gold spot price ticked $0.42 lower at $1,278.52 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.79

Homebuilder sentiment slips but remains solidly in positive territory

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month declined to 68 from May’s unrevised 70 level, where the Bloomberg forecast called for it to remain. However, a reading of 50 separates good and poor conditions. The NAHB said builders are optimistic about housing market conditions as consumer demand continues to grow. However, builders are increasingly concerned that tariffs placed on Canadian lumber and other imported products are hurting housing affordability.

Today’s report kicked-off the economic week that will be loaded with housing data, as the May housing starts and building permits report will follow tomorrow as the sole release from the economic calendar, with starts expected to have increased 1.9% m/m and permits forecasted to have declined 1.0% m/m. The housing data will culminate with Wednesday’s release of May existing home sales. Additional reports that will likely garner some attention later in the week include the Leading Index for May and preliminary Markit business activity reports for June.

Treasuries were flat, with the yields on the 2-year and 10-year notes, as well as the 30-year bond rate all nearly unchanged at 2.55%, 2.92% and 3.05%, respectively.

Treasury yields and the U.S. dollar were relatively quiet, while the stock markets slipped amid festering trade concerns between China and the U.S. after both traded tariff announcements last week. Political uncertainty in Europe also lingered and crude oil prices were in focus ahead of an expected OPEC meeting this week that could result in a production announcement. Finally, the global markets continued to assess last week’s Fed rate hike and possible timeline for the European Central Bank (ECB) to begin to unwind its stimulus measures.

U.S. stocks have been trending higher, but endured some rough water over the past few weeks. Although bumpy, major U.S. indexes have moved to the top of the recent range and the secular bull market should stay intact. The U.S. economy is in good shape and likely able to withstand some of the brewing storms. Bouts of volatility are unlikely to diminish Fed tightening expectations. Trade concerns are ramping up; and although the major global players look able to withstand at least some trade stress, the margin for error is narrowing.

Europe and Asia mostly lower as global markets slide on trade worries

European equities finished broadly lower, with trade concerns hamstringing the global markets, which were exacerbated by the U.S. and China trading tariff announcements last week, while the energy sector garnered attention ahead of this week’s OPEC meeting. Political uncertainty in the region also lingered, likely draining conviction, with Germany grappling with a standoff regarding immigration.

The euro was little changed versus the U.S. dollar with ECB President Mario Draghi expected to speak this evening and later this week following last week’s monetary policy meeting that gave us a look at the possible timing of the central bank’s start to getting on the path to monetary policy normalization. The British pound lost some ground on the greenback, while bond yields in the region were mostly lower.

Stocks in Asia finished lower with the global markets remaining on edge as last week’s announced tariffs from the U.S. and China toward one another escalated trade concerns, while the markets also focused on the energy sector as an OPEC meeting later this week looms.

Japanese equities fell, with the yen moving higher and data showing the nation’s trade deficit narrowed by a smaller amount than expected for May. However, volume was lighter than usual as markets in China and Hong Kong were closed for holidays. Australian securities bucked the trend, ticking higher amid some weakness in the Australian dollar and strength seen in the financial sector, which offset losses for materials and energy issues. Indian stocks declined and South Korean shares led to the downside as the tech sector saw some pressure.