Chevron left arrow. Market Commentary

Financial Markets Commentary For the week of June 04, 2018

Key Market Data

05/25/2018 06/01/2018 One Week Change YTD One Year
S&P 500 Index 2,721.33 2,734.62 +0.49% +3.13% +14.74%
MSCI EAFE Index 2,014.52 1,992.40 -1.10% -0.91% +8.58%
Barclays Capital U.S. Aggregate Bond Index 2,000.66 2,008.58 +0.40% -1.85% -0.64%
10-year Treasury Note Rate 2.932% 2.903% -2.9 basis points +49.7 basis points +69.1 basis points

Last week was short due to the Memorial Day break, but long on drama. The indexes were buffeted up and down by worries about Italy, an escalating trade war and great jobs numbers – among other issues – with the Dow Jones Industrial Average rising or falling at least 200 points every session. Thanks to a rebound Friday, the indexes finished mixed for the week, but still up for all of May. The Dow added 1.4 percent, the S&P 500 Index – powered by tech stocks – added 2.4 percent and the Nasdaq added 5.5 percent.

Stocks tumbled Tuesday due to news that Italy’s president Sergio Mattarella rejected a coalition plan to form a government because he was wary of the anti-eurozone economy minister that was chosen. Italian bond yields soared and stocks plunged in Europe and the United States, especially the stocks of banks seen as vulnerable to Italian debt. Investors took refuge in German and American bonds, with the yield on the 10-year U.S. Treasury Note Rate having its biggest one-day drop since Brexit in June 2016.

Also Tuesday, the White House unexpectedly announced that it was moving ahead with 25 percent tariffs on $50 billion in Chinese exports to the U.S. that just the week before seemed to be on hold. The list of goods subject to tariffs will be announced June 15 and the tariffs will be implemented “soon thereafter,” the White House said. In addition, President Donald Trump said steps would be announced June 30 to prevent Chinese investment in U.S. tech companies. Over the weekend, Commerce Secretary Wilbur Ross visited Beijing. But after Sunday’s meeting, China’s state news agency announced that any proposed trade deals discussed would “not take effect” if the U.S. moved ahead with the tariffs. Neither side issued a post-meeting statement.

Wednesday, stocks rebounded after Italy managed to form a government with a different economy minister. This minister is still seen as a euro-skeptic though not an advocate of leaving the European Union (EU), and, therefore, avoiding another round of elections. (Spain’s Prime Minister Mariano Rajoy was ousted Friday in a no-confidence vote, but investors were less concerned about his pro-EU successor, Pedro Sánchez.) Thursday, stocks then resumed their downward spiral after Trump said the White House was moving ahead with steel and aluminum tariffs on some of the countries, all allies, that had been granted temporary exemptions – including Canada, Mexico and the EU. The White House maintained that the tariffs would create jobs and indicated it was ready to deal. Commerce Secretary Wilbur Ross said, “We continue to be quite willing and indeed eager to have further discussions with all of these parties.”

Still, there was concern from some Republicans in Congress, with Senator Orrin Hatch (R - Utah) saying the steps “will have damaging consequences for consumers, manufacturers and workers.” Canada, Mexico and the EU all said they would retaliate – and lodge an official protest with the World Trade Organization. The tariffs were also seen as likely to derail any progress on the North American Free Trade Agreement (NAFTA) negotiations with Canada and Mexico.

Saturday, six finance ministers from the Group of Seven (G7) issued a joint statement that excluded the U.S. The statement expressed “unanimous concern and disappointment” with the tariffs and pushed to “restore collaborative partnerships to promote free, fair, predictable and mutually beneficial trade.” Treasury Secretary Steven Mnuchin attended the meeting in Canada but took the high road, saying there were “many, many areas” that the finance ministers were “completely united on.” The G7 leaders, including Trump, are scheduled to meet this week in Canada.

Stocks rebounded yet again Friday after the government announced the jobs report for May. A total of 223,000 jobs were added, well above the forecast of 190,000, and the jobless rate fell to 3.8 percent from April’s 3.9 percent. For the record, the last time the jobless rate was below 3.8 percent was in 1969, when President Richard Nixon was in the Oval Office. Other metrics were positive as well. The 3.6-percent jobless rate for women was the lowest since 1953, and the jobless rates for blacks and Latinos were at or near record lows. Hourly earnings were up 0.3 percent from April and 2.7 percent from a year earlier. And the labor force participation rate fell from 62.8 percent to 62.7 percent.

Volcker 2.0

The Federal Reserve Bank of New York has proposed modifying the 2010 Volcker Rule, part of the post-recession Dodd-Frank Wall Street Reform and Consumer Protection Act designed to stop big banks from making risky investments. Fed Chairman Jerome Powell said the goal of the changes was to allow banks to “conduct appropriate activity without undue burden and without sacrificing safety and soundness.”

MSCI welcomes China

The MSCI Emerging Markets Index added Chinese shares last week, a step China has long sought. Despite concerns about transparency and the role of the Chinese government in the stock market, about 230 stocks will be added this year, comprising less than 1 percent of the index.

In other news, the government issued its second estimate for first-quarter gross domestic product (GDP) growth, which came in at 2.2 percent, down from the original 2.3 percent. The Institute for Supply Management (ISM) Manufacturing Index rose to 58.7 in May from 57.3 in April – any reading above 50 indicates expansion.

Personal spending advanced 0.6 percent in April from the month before, the biggest increase in five months. Personal income was up 0.3 percent while personal savings fell to 2.8 percent, the lowest level since December. The Personal Consumption Expenditures Price Index – the Fed’s preferred inflation gauge – was up 0.2 percent and 2 percent from a year earlier. Excluding food and energy, prices climbed 0.2 percent in April and 1.8 percent from a year earlier.

Pending home sales declined 1.3 percent in April from March and were up 0.4 percent year on year. The S&P CoreLogic Case-Shiller Home Price Index rose 6.79 percent in March from a year earlier. Construction spending was unchanged in April from the month before. The Conference Board said that its Consumer Confidence Index hit a three-month high of 128 in May compared to 125.6 in April. And first-time jobless claims for the week ending May 26 fell 13,000 to 221,000; the four-week moving average was up 2,500 to 222,250.

A look ahead

This week’s updates will include the latest on orders for durable, factory and capital goods, as well as job openings, the ISM Non-Manufacturing Index, the trade balance, non-farm productivity, consumer comfort, consumer credit and wholesale inventories.