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Market Commentary, May 21, 2018 For the week of May 21, 2018

Key Market Data

05/11/2018 05/18/2018 One Week Change YTD One Year
S&P 500 Index 2,727.72 2,712.97 -0.54% +2.24% +16.93%
MSCI EAFE Index 2,059.94 2,047.36 -0.61% +1.62% +13.10%
Barclays Capital U.S. Aggregate Bond Index 1,999.69 1,990.49 -0.46% -2.73% -1.34%
10-year Treasury Note Rate 2.971% 3.057% +8.6 basis points +65.1 basis points +82.7 basis points

All three of the major indexes were slightly down last week as representatives from China and the United States met to discuss trade, a populist – and anti-European Union – coalition stood poised to take power in Italy, and the rising yield on the 10-year Treasury Note Rate hit its highest level since 2011. The Russell 2000 Index of Small Cap companies was the exception for stocks as it notched a record high for three days straight.

Three weeks ago, a U.S. delegation sent to discuss trade returned from China empty-handed. This past week, Chinese President Xi Jinping dispatched his top economic advisor Vice Premier Liu He to Washington to continue the discussions. Though progress was made, the post-meeting joint statement was short on details. The statement read, “To meet the growing consumption needs of the Chinese people and the need for high-quality economic development, China will significantly increase purchases of United States goods and services.”

Earlier last week, it seemed China was ready to commit to increasing its purchase of U.S. goods by $200 billion between now and 2020, but there was no such figure in the statement. Sunday, however, Treasury Secretary Steven Mnuchin said that “a framework” for increasing exports to China had been agreed upon and added, “We’re putting the trade war on hold.” According to China’s official news agency, Liu concurred, saying, “Both sides agreed to avert a trade war and to stop imposing tariffs on each other.” The meeting took place during a week in which President Donald Trump said he wanted to help employees of China’s ZTE Corporation, which has been hit hard by recent sanctions. But Trump also tweeted, “We have been ripped off by China!”

Japan makes a move

In a sign that it’s ready to push back against the United States, Japan told the World Trade Organization on Friday that it had the right to impose tariffs in response to those recently put in place by Trump on steel and aluminum. Japan has yet to do so, however, presumably because it’s still hoping to negotiate an exemption.

Retail sales rise along with the 10-year Treasury

Tuesday, the government announced that retail sales rose 0.3 percent in April from an upwardly revised 0.8 percent in March. That helped push the yield on the 10-year Treasury Note Rate to 3.073 percent, its highest level since 2011. Thursday, the rate climbed higher still to 3.112 percent. Bond yields tend to rise when consumers are spending because spending leads to stronger growth, and perhaps higher inflation. Core retail sales – less autos, gas and building materials – increased 0.4 percent.

Q1 earnings and business buybacks soar

With the first quarter earnings season all but over, the growth rate for the 93 percent of the S&P 500 companies that have reported is 24.5 percent, according to FactSet. If that holds up, it will be the best showing since the third quarter of 2010. And during the first quarter, American companies have used the proceeds from the recent tax cuts to buy back $178 billion in shares, up 42 percent from a year earlier and a new quarterly record, according to the S&P Dow Jones Indices.

Next year for NAFTA?

The prospect of a new North American Free Trade Agreement (NAFTA) deal before year’s end is remote, partly because of elections in Mexico in July and the U.S. in November, which make politicians on either side reluctant to act. Speaker of the House Paul Ryan (R-Wis.) had set a “soft” deadline of May 17 if Congress was going to get a deal approved before the midterm elections. U.S. Trade Representative Robert Lighthizer said the three countries were “nowhere near close to a deal.”

Italy gets a new government, Catalonia gets a new leader

It appears that Italy will finally have a ruling coalition, but one that may threaten that nation’s role in the European Union. Two populist parties – the Five Star Movement and the Anti-immigration League – have agreed to form a government, pending the approval of Italy’s president. It’s not clear which party will claim the prime ministry, but the coalition gave a preview of its plans in a joint statement which read, “We believe it is necessary to review, together with our European partners, the economic governance structure of Europe.”

Catalonia elected a new leader, Quim Torra, whose election is expected to bring an end to the Spanish government’s direct rule of the region, which began last October when Catalonia voted to secede from Spain.

A slowdown in Japan

Japan’s economy contracted 0.6 percent in the first quarter, largely because of reduced business spending. It was the first contraction since the last quarter of 2015, bringing an end to Japan’s longest growth streak since 1989.

Mortgages climb to a seven-year high

The rate on a 30-year mortgage rose to 4.61 percent last week, its highest level since 2011, according to Freddie Mac. This could impact home sales and especially first-time home buyers. The Mortgage Bankers Association reported that mortgage applications for the week ending May 11 fell 2.7 percent, the fourth consecutive weekly decline.

In related news, housing starts dipped 3.7 percent in April from the month before to an annualized rate of 1,287,000, but were up 10.5 percent from a year earlier. Applications for building permits were off 1.8 percent in April from March to 1,352,000, but were 7.7 percent higher than in April of 2017.

Industrial production increased 0.7 percent in April from March, while manufacturing production was up 0.5 percent. Capacity utilization rose from March’s 77.6 percent to 78 percent. Business inventories were flat in March from the month before. The Conference Board Leading Economic Index climbed to 109.4 in April from 109 in March. And first-time jobless claims for the week ending May 11 increased 11,000 to 222,000; the four-week moving average fell 2,750 to 213,250.

A look ahead

This week’s updates will include the latest on new and existing home sales, consumer sentiment and orders for durable and capital goods. The Federal Reserve Bank of New York will also release the minutes of its May meeting.