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Financial Markets Commentary For the week of June 11, 2018

Key Market Data

06/01/2018 06/08/2018 One Week Change YTD One Year
S&P 500 Index 2,734.62 2,779.03 +1.62% +4.84% +16.43%
MSCI EAFE Index 1,992.40 2,010.49 +0.91% +0.04% +9.57%
Barclays Capital U.S. Aggregate Bond Index 2,008.58 2,004.08 -0.22% -2.07% -1.02%
10-year Treasury Note Rate 2.903% 2.947% +4.4 basis points +54.1 basis points +75.8 basis points

Trade war? What trade war?

During a week in which tensions between the United States and its allies rose to a fever pitch in the run-up to the Group of 7 (G7) meeting in Canada, investors were apparently unfazed. The Dow Jones Industrial Average moved comfortably back past the 25,000 mark and the Nasdaq set a record – three days in a row.

Now it remains to be seen what the response will be to this past weekend’s contentious conclave in Quebec. At that gathering President Donald Trump refused to sign the post-meeting communique, called his host, Canadian Prime Minister Justin Trudeau, “very dishonest and weak,” and threatened to introduce new tariffs on automobiles. Trump left the meeting early to head for his Singapore summit with North Korean Leader Kim Jong-un.

Early last week, investors still seemed to be aglow over May’s jobless report – released June 1 – which showed that the economy added 223,000 jobs while the unemployment rate fell to 3.8 percent. In addition, last Tuesday stocks rose after China said it would buy $70 billion worth of American farm, manufacturing and energy products if the U.S. backed off on its new tariffs; the offer will be withdrawn if the tariffs are imposed. Then Wednesday, the Dow added 346 points after the administration said it was lifting the seven-year ban on buying American parts that was recently imposed on China’s largest telecom, ZTE Corporation, because it sold equipment to Iran and North Korea.

The move by the White House was reportedly in response to a personal plea by Chinese President Xi Jinping, as ZTE was reeling from the ban. ZTE will pay a $1 billion fine, replace many of its top executives and will agree to American compliance officers. But though the accord may have been seen as a thawing in the trade war between China and the U.S., many congressmen were irate. A committee was formed to overturn the deal, and as the best evidence of what a bad idea he thought it was, Senator Mark Warner (D-Va.) noted that the deal “built a virtual unanimous bipartisan coalition.”

As for the summit, Trump arrived in Canada amid heightened tensions after saying he was ending the temporary exemptions from tariffs on steel and aluminum on long-time allies, including Canada and the European Union. Once there, he further challenged the G7 leadership by saying he thought Russia should be readmitted to the group (Russia was ousted in 2014 after its invasion of Crimea).

Prior to leaving the meeting Saturday, Trump said he had broached the idea of a “tariff-free” zone with G7 leaders but also threatened to stop trading with partners who he saw as taking advantage of the U.S. “It’s going to stop,” he told reporters, “or we’ll stop trading with them,” adding, “We’re like the piggy bank that everybody’s robbing, and that ends.” Trump also warned, “If they retaliate, they’re making a mistake.”

Trudeau responded saying, “We will not be pushed around,” and indicated Canada would move ahead with retaliatory tariffs. (Earlier last week, Mexico – not a G7 member – also said it would strike back with tariffs on U.S. goods.) The post-meeting statement, which the White House initially said it would sign, underscored “the crucial role of a rules-based international trading system,” and said member nations would “strive to reduce tariff barriers, nontariff barriers and subsidies.”

A Social Security shortfall

The government announced that Social Security payments will exceed income this year for the first time since 1982, three years sooner than expected due to lower tax revenues. As a result, the government will have to borrow from its $3 trillion trust fund to meet its obligations.

Good and bad news from the World Bank; CEOs turn cautious

The World Bank said that despite the recent trade drama, global gross domestic product (GDP) growth would come in at 3.1 percent this year, unchanged from the bank’s January forecast. That rate would match 2017, which was the best year since 2011. However, the World Bank’s latest Global Economic Prospects Report said that if the tariffs triggered trade wars, the result would be “devastating.”

America’s CEOs were also worried about trade. The Business Roundtable’s second-quarter survey showed that the CEOs’ economic outlook fell for the first time in almost two years, though it remained well above the historical average of 81.2 at 111.1 following the record high of 118.6 in the first quarter. 95 percent of the respondents saw a “moderate” or “serious” risk of “foreign trade retaliation leading to lower U.S. exports.”

Job openings outpace job seekers; trade gap narrows

In other news, the U.S. Department of Labor said there were more job openings than job seekers for the first time since recordkeeping began, which should help drive pay gains. There were 6.7 million openings at the end of April with 6.3 million jobless Americans (though the surplus of jobs actually first happened in March because of recent revisions). The trade gap narrowed 2.1 percent to a seven-month low of $46.2 billion thanks in part to record oil and fuel exports.

Still, for the first four months of 2018, the gap was up 11.6 percent from a year earlier. Durable goods orders for April fell 1.6 percent, while factory orders were off 0.8 percent. Orders for nondefense capital goods excluding aircraft increased 1.0 percent. The Institute for Supply Management Non-Manufacturing Index was 58.6 in May, up from April’s 56.8. For the first three months of 2018, worker productivity was revised down to an increase of 0.4 percent from the original estimate of 0.7 percent. And first-time jobless claims for the week ending June 2 fell 1,000 to 222,000; the four-week moving average was up 2,750 to 225,500.

A look ahead

Next week’s updates will include the latest on small business confidence, the Consumer Price Index (CPI), the Producer Price Index (PPI), retail sales, the Consumer Comfort Index, business inventories and industrial production. The Federal Reserve Bank of New York will meet Tuesday and Wednesday, and is widely expected to raise its benchmark rate for the second time this year. The European Central Bank will also meet and, depending on the source, may or may not announce that it will cut back its bond buying later this year.