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Market Commentary, June 18, 2018 For the week of June 18, 2018

Key Market Data

06/08/2018 06/15/2018 One Week Change YTD One Year
S&P 500 Index 2,779.03 2,779.66 +0.02% +4.92% +16.43%
MSCI EAFE Index 2,010.49 2,000.09 -0.52% -0.44% +8.12%
Barclays Capital U.S. Aggregate Bond Index 2,004.08 2,006.59 +0.13% -1.94% -0.93%
10-year Treasury Note Rate 2.947% 2.921% -2.6 basis points +51.5 basis points +75.6 basis points

Last week brought about enough positive economic news that investors shrugged off the post-meeting friction between the United States and its Group of 7 (G7) allies, as well as higher-than-expected interest rates this year courtesy of the Federal Reserve. On Friday, the prospect of a full-fledged trade war with China was enough to plant seeds of doubt, sending the Dow to its worst week since March, down 0.9 percent, but the S&P 500 was still narrowly up and the NASDAQ gained 1.3 percent. The yield on the ten-year dipped on Friday after the American and Chinese tariffs were announced and declined for the week.

The back and forth between President Donald Trump and China over the trade gap has been going on for months, but on Friday words turned into action. The White House announced a 25 percent tariff on $50 billion in Chinese goods, and China’s government promptly said it would retaliate in kind, despite a threat from Trump that retaliation would lead to another $100 billion in tariffs. China also said that should the U.S. move ahead with the tariffs, it would back away from its recent pledge to buy $70 billion in American goods. China will mirror the U.S. by imposing the new tariffs in two steps: $36 billion on July 6 and another $14 billion at a later date. In announcing the tariffs, Trump said they were essential to prevent “further unfair transfers of American technology and intellectual property to China, which will protect American jobs.” Citing national security, the government is also planning to limit Chinese investment in American businesses beginning on June 30. The lists of products subject to tariffs have yet to be released, but on Friday the price of oil, gold, copper and aluminum, among other commodities, all dropped; China is the world’s largest buyer of many such raw materials.

Central Banks shift gears… or not?

Three of the world’s leading central banks met last week, with one, the Federal Reserve Bank of New York, moving forward faster than expected; a second, the European Central Bank (ECB), shifting cautiously into first gear; and a third, the Bank of Japan (BOJ), remaining firmly in neutral. As expected, the Fed raised its rate for the second time this year, but also indicated that the economy was strong enough to weather two more hikes this year. The Fed’s rate is now in the 1.75-to-2 percent range – it was last above 2 percent in 2008. At his post-meeting press conference, Chairman Jerome Powell said the decision was “another sign that the U.S. economy is in great shape.” He also commented on the strength of the job market, saying, “Most people who want to find jobs are finding them.” As for slow wage growth, he admitted it was “a bit of a puzzle,” but also suggested it would normalize. The Fed remarked that the gross domestic product (GDP) would hit 2.8 percent this year (compared to an estimate of 2.7 percent in March), while the jobless rate would fall to 3.6 percent (compared to 3.8 percent in March), and inflation would rise to 2.1 percent (compared to 1.9 percent in March). In addition, Powell announced that, beginning in January, he will hold a press conference after every Fed meeting rather than after every other session, as analysts correctly concluded that the Fed would only raise rates at meetings followed by a press conference. As for the ECB, it announced that later this year it would bring an end to the quantitative easing program that it started in 2015, despite the recent slowdown in the eurozone’s economy. However, the bank will continue to leave its interest rate – and negative deposit rate – unchanged until at least the summer of 2019. The ECB also lowered its forecast for GDP this year to 2.1 percent from 2.4 percent. And the BOJ, which met Friday, chose to stand pat on both bond buying and its deposit rate, also negative, because of stubbornly slow inflation.

Oil continues its recent rollback

The price of U.S. crude oil fell for the fourth week in a row as buyers seemed to have decided that The Organization of the Petroleum Exporting Countries (OPEC) and Russia will soon increase output to cover lost production in Libya (because of rebels attacking ports), Venezuela (because of economic dysfunction), and Iran (because of the re-imposition of U.S. sanctions). Saudi Arabia has already modestly increased output and is expected to push for further production increases at the OPEC meeting this week, putting an end to the cutbacks that had been scheduled to continue through 2018.

AT&T wins; Comcast enters the fray

A judge ruled against the United States Department of Justice last week, saying that AT&T’s proposed $84.5 billion merger with Time Warner, which had been pending since 2016, could go ahead because it would not hurt consumers. The Wall Street Journal called the ruling “a historic defeat for the Justice Department” that could trigger “a cascade of other deals” in the media industry. Almost immediately following these events, Comcast entered into a bidding war with Disney to acquire a majority stake in Rupert Murdoch’s 21st Century Fox.

The deficit widens; CPI hits a six-year high

Because of lower revenues and higher spending, the budget deficit was $532.24 billion for the first eight months of the fiscal year (October through May), up 23 percent from a year earlier. The deficit for May alone jumped 66 percent to $146.80 billion. In other news, thanks to more expensive gas, the consumer price index rose 0.2 percent in May and was up 2.8 percent from a year earlier, the fastest pace since February of 2012. The Core Consumer Price Index (Core CPI) gained 0.2 percent month over month and 2.2 percent over the last year. The Core Producer Price Index (Core PPI) climbed 0.5 percent in May from April and 3.1 percent over the last twelve months, the biggest year-over-year gain since January of 2012. Core PPI was up 0.1 percent for the month and 2.6 percent for the year. Retail sales in May increased 0.8 percent from April, the largest advance since November of 2017. Industrial production fell 0.1 percent in May from the month before, though the decline was partly the result of a fire at one of Ford’s suppliers; production was up 3.5 percent from a year earlier. The National Federation of Independent Business (NFIB) Index of small business optimism rose from 104.8 in April to 107.8 in May, its second highest reading on record. Notably, compensation increases hit a forty-five year high, positive earnings trends reached a survey high, positive sales trends were at their highest level since 1995, and expansion plans reached their highest point in the survey’s history. The University of Michigan said its consumer sentiment index was 99.3 in June compared to 98.0 in May. And first-time jobless claims for the week ended June 9 fell 4,000 to 218,000; the four-week moving average dropped 1,250 to 224,250.

A look ahead

This week’s releases will include the latest on housing starts and building permits, existing home sales, consumer comfort, and the Conference Board’s Leading Economic Index.