Key Market Data
|06/29/2018||07/06/2018||One Week Change||YTD||One Year|
|S&P 500 Index||2,718.37||2,759.82||+1.52%||+4.25%||+16.73%|
|MSCI EAFE Index||1,958.64||1,969.61||+0.56%||-1.85%||+8.02%|
|Barclays Capital U.S. Aggregate Bond Index||2,013.28||2,018.09||+0.24%||-1.38%||+0.11%|
|10-year Treasury Note Rate||2.861%||2.823%||-3.8 basis points||+41.7 basis points||+45.6 basis points|
- Institute for Supply Management (ISM) Manufacturing index rose to 60.2 in June from 58.7 in May; above expectations of 58.5.
- ISM Non-Manufacturing index jumped to 59.1 in June from 58.6 in May, beating forecasts of 58.3.
- U.S. trade deficit narrowed sharply to $43.1 billion in May 2018 from a revised $46.1 billion in the previous month.
The third quarter began much like the second quarter ended, with positive U.S. market trends driven by solid fundamental factors that more than outweighed U.S. tariff actions and immediate Chinese retaliation on $34 billion of traded goods. All three major U.S. indexes moved higher. Nasdaq led the charge with a gain of 2.37 percent for the week, followed by the S&P 500 Index gaining 1.52 percent and the Dow rising 0.76 percent. While much of the conversation throughout the week centered on the tariff deadline, solid economic data and affirmation by the Federal Open Market Committee (FOMC) minutes that labor markets are strengthening and economic activity continues to rise proved to be the difference-maker. Labor market data showed that employers added 223,000 workers to their payrolls in June, extending the longest continuous job expansion to 93 months, and the unemployment rate moved upward to 4 percent from 3.8 percent as the number of job seekers increased in June.
At midnight on Friday, July 6, the United States enacted levies against $34 billion in Chinese goods, which were met immediately by Chinese retaliatory action. Although the initial impact is small with regard to total trade, concerns are increasing over what may happen next with the possibility of more tolls on imports, further investment restrictions or the potential for aggressive currency-weakening by China. Chinese trade data showed that exports to the U.S. are slowing; however, analysts largely dismissed these figures, pointing to Beijing’s messaging campaign in its tariff battle with Washington. The Shanghai Composite has fallen 16 percent year-to-date and the yuan has slumped 3.6 percent against the dollar since the beginning of June, pushed down by a combination of selling by nervous investors and Chinese central bank efforts to guide it lower in the face of a potential trade war. However, policymakers may not be all too eager to let the yuan slide too fast, as it could force capital outflows and lead to a liquidity shortage in the financial system.
The Federal Reserve raised the target range for the federal funds rate by a quarter of a percentage point to between 1.75 percent and 2 percent during its June meeting. Policymakers’ comments centered on a strengthening labor market and solid economic activity, while upping their projection for two additional hikes by the end of this year (as opposed to a previously estimated one). The tone continued to reflect gradual movements as the prudent course of action and participants generally judged that it would be appropriate to continue gradually raising the target for the federal funds rate to a setting that was at or somewhat above their estimates of its longer-run level by 2019.
While comments around economic conditions were generally favorable, the Fed noted growing risks associated with trade policy leading to potential negative effects on business investment spending, and some participants felt that the current path of fiscal policy is unsustainable.
213,000 jobs were added in June (above expectations of 195,000) and revisions to the April and May figures added another 37,000 jobs. Headline unemployment rose to 4 percent, with the labor force growing by 601,000 and the labor force participation rate rising to 62.9 percent, up 0.2 percent from May.
Manufacturing/services data paints a rosy picture
U.S. manufacturing surged in June, with the Institute for Supply Management (ISM) Manufacturing Index rising to 60.2 from 58.7 in May, surpassing expectations of 58.5. The strong expansion in the manufacturing sector looks set to continue with the leading indicator of future growth – new orders – surpassing the 60 level for the 13th consecutive month, and 17 out of the past 18 months.
The ISM Non-Manufacturing Index also rose to a strong 59.1 in June from 58.6 in May, beating forecasts of 58.3. This is the highest reading since February, with business activity and new orders rising while price pressures eased slightly. There continues to be a sense of optimism about business conditions and the overall economy with underlying weariness concerning tariffs, supply constraints and delivery.
The U.S. trade deficit narrowed sharply to $43.1 billion in May from a revised $46.1 billion the previous month, below market expectations of $43.6 billion. This is the smallest trade gap seen since October 2016. Exports hit a record high, rising 1.9 percent from April, while imports grew by 0.4 percent. The politically sensitive goods trade deficits with China rose to $32 billion in May from $30.8 billion in April, and is up 9.9 percent year-to-date from the same period in 2017.
A look ahead
This week’s updates will focus on Core Producer Price Index (PPI) and Consumer Price Index (CPI) data, consumer credit, small business optimism, initial jobless and continuing jobless claims, and wholesale inventories.