Arrow Created with Sketch. Market Commentary

Stocks Climb as Investors Shift Focus to the Fed For the week of June 17, 2019

Key Market Data

06/07/2019 06/14/2019 One Week Change YTD One Year
S&P 500 Index 2,873.34 2,886.98 +0.47% +16.29% +5.87%
MSCI EAFE Index 1,875.62 1,870.17 -0.29% +11.29% -3.85%
Barclays Capital U.S. Aggregate Bond Index 2,152.48 2,152.94 +0.02% +5.20% +7.41%
10-year Treasury Note Rate 2.083% 2.081% -0.2 basis points -60.4 basis points -85.5 basis points

The major indexes finished up for a second straight week. Investors temporarily turned their attention from the trade war front to the Federal Reserve, which meets this week. Evidence that inflation remains muted led many to believe that the Fed will cut its benchmark rate this year, though probably not at this week’s meeting.

The Fed: Setting the stage?

When the Fed meets this Tuesday and Wednesday, some observers think the committee will set the stage for a July rate cut by moderating its outlook for economic growth and perhaps dropping the word “patient” from its post-meeting statement. President Trump, meanwhile, continued to chide the Fed. On Friday he said that the market would be “10,000 points higher” if the Fed had already cut its rate. He again castigated the Fed’s Chairman Jerome Powell, who Trump appointed, saying the stock market and the economy would be better “if we had somebody different in charge.” He also said, “The head of the Fed in China is President Xi,” adding, “he can do whatever he wants,” while accusing China of regularly devaluing its currency to boost economic growth.

Trade talks

There was, of course, still some news from the trade war front last week. President Trump said that the threat of new tariffs on Mexico had been “indefinitely suspended,” noting, “If we didn’t have tariffs, we wouldn’t have made a deal with Mexico.” Attention then turned back to China and whether or not President Trump and China’s President Xi Jinping would meet on the sidelines of the G-20 conclave in Japan at the end of the month, a meeting that China has yet to confirm. Trump indicated that he might hit China with a new round of tariffs on $300 billion in goods if Xi doesn’t attend the meeting, but on Friday he said, “If he shows up, good, if he doesn’t — in the meantime, we’re taking in billions of dollars a month [in tariffs] from China.”

There was also fresh evidence last week of the impact of the trade war on China. First, imports fell 8.5 percent in May from a year earlier, while exports rose just 1.1 percent. And industrial production increased 5 percent in May year over year, the slowest pace since 1992, though retail sales in the country were up a better-than-expected 8.6 percent. China’s forecast for GDP growth in 2019 is 6-to-6.5 percent, but even if it comes in at the top end of the estimate, it would be the smallest increase in a quarter century.

Oil and Iran

Despite higher inventories, the price of oil rebounded last week from its recent decline after the attacks on tankers in the Gulf of Oman. President Trump and Secretary of State Mike Pompeo accused Iran of being behind the attacks, although Iran’s government rejected those charges. Ministers from Europe and Russia urged the two sides to proceed with caution.

Johnson the frontrunner to replace May

Boris Johnson has emerged as the favorite to replace Theresa May as Britain’s Prime Minister, with the new prime minister expected to be on the job by early next month. Last year, Johnson resigned from May’s cabinet to protest her Brexit plan. Last week, he pledged to push ahead with the Brexit regardless of whether or not Britain is able to cut a deal with the European Union. Johnson said, “It’s time to end this debilitating uncertainty,” while admitting that if there was no exit plan, he expected “some plaster to come off the ceiling.”

Sprint and T-Mobile deal headed for court

Nine states including New York and California filed a lawsuit last week to stop the proposed $26 billion merger of Sprint and T-Mobile, the third and fourth largest companies in the field, claiming the combination would hurt consumers. The federal government is still reviewing the merger but has indicated that it may give it the greenlight if the two companies sell off some assets, including Sprint’s Boost Mobile.

In other news, not only did retail sales rise a solid 0.5 percent in May from April, but April’s sales were revised up from -0.2 percent to a gain of 0.3 percent and March’s from a solid 1.1 percent to an even stronger 1.8 percent. Industrial production increased 0.4 percent in May from April, beating the forecast and registering the biggest increase in six months. Production was up 2 percent from a year earlier, while manufacturing production rose 0.2 percent for the month. Capacity utilization came in at 78.1 percent in May. The producer price index advanced 0.1 percent in May from April, while core PPI, less food and energy, rose 0.2 percent. For the year, PPI was up 1.8 percent and core PPI 2.3 percent. The consumer price index also rose 0.1 percent in May from April, as did core CPI. For the year, CPI was up 1.8 percent and core CPI 2 percent. There was other news about inflation when the University of Michigan’s survey showed that respondents thought it would average 2.2 percent over the next five years, the lowest level in the forty years that the question has been on the survey. The first reading for consumer sentiment for June was 97.9 compared to May’s 100. The Business Roundtable’s CEO Economic Outlook Index was down 5.7 points in the second quarter to 89.5. The National Federation of Independent Business’s small business optimism index was up 1.5 points in May to 105. Import prices fell 0.3 percent in May from April, the largest decline in five months. The government said the number of job openings exceeded the number of job seekers by a record margin in April, indicating that companies are having a hard time finding the right people for the job. There were 7.449 million open positions at the end of the month, while the number of job seekers was 5.824 million. Openings were up 4.8 percent from a year earlier while new hires hit 5.9 million, a record total (though not a record as a percentage of the workforce). And first-time jobless claims for the week ending June 8th rose 3,000 to 222,000; the four-week moving average gained 2,500 to 217,750.

A look ahead

This week’s calendar includes releases on housing starts and building permits, the Conference Board’s leading index, existing home sales, and, as noted, the Fed’s two-day meeting.

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