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Why Good Economic News Was Bad for Stocks For the week of July 8, 2019

Key Market Data

06/28/2019 07/05/2019 One Week Change YTD One Year
S&P 500 Index 2,941.76 2,990.41 +1.65% +20.55% +11.50%
MSCI EAFE Index 1,913.83 1,932.13 +0.96% +15.14% +2.46%
Barclays Capital U.S. Aggregate Bond Index 2,171.71 2,168.50 -0.15% +5.96% +7.57%
10-year Treasury Note Rate 2.006% 2.035% +2.9 basis points -65.0 basis points -79.5 basis points

Good news on jobs Friday halted investor’s exuberance that had pushed stocks higher earlier in the week. Some feared the unemployment report was so good that the Federal Reserve might not lower its benchmark rate when it meets at the end of this month — or that it might only cut the rate a quarter of a point rather than the hoped-for half point. On Wednesday there had been early fireworks as all three indexes set records. Despite Friday’s decline, they ended the week within shouting distance of Wednesday’s closes; the S&P 500, for example, posted its second-best finish ever on Friday. For the week, the Dow gained 1.2 percent, the S&P 500 was up 1.7 percent, and the Nasdaq increased 1.9 percent. The yield on the 10-year Treasury, after closing below 2 percent at midweek, rallied on Friday off the jobs report to finish at 2.035 percent.

Though the week began with the encouraging news that China and the United States would return to the negotiating table, it ended with new provocations from both sides. First, China’s Commerce Minister Gao Feng said, “If the two sides are to reach a deal, all imposed tariffs must be removed.” But President Trump has pledged to keep them in place. Later in the week, the Justice Department moved to have a lawsuit filed by Huawei dismissed. Huawei is suing because the U.S. government has stopped federal agencies from doing business with it. The Justice Department said that Huawei was a threat to national security because of its close relationship with China’s government.

To punctuate the impact of the ongoing trade war, on Friday, the Fed released its semiannual “Monetary Policy Report,” which said that the trade war was hurting both business spending and manufacturing. The Fed pledged to “act as appropriate to sustain the expansion.”

The EU: New tariffs and new trade deals

There was another skirmish on the trade front last week when the White House said it was considering $4 billion in new tariffs against the European Union, pending a public hearing, because of the longstanding dispute over the EU’s subsidies for Airbus. This comes after the EU closed two new deals to lower or eliminate tariffs, one with Mercosur (Argentina, Brazil, Paraguay and Uruguay), and the other with Vietnam. Both trade pacts are subject to approval.

The jobs report

On Friday, the Labor Department said that 224,000 jobs were created in June, well above the forecast of 165,000. The unemployment rate ticked up from 3.6 percent to 3.7 percent, mainly because of more people looking for work. This came after only 72,000 jobs were created in May, triggering fear in some quarters of a slowdown in hiring. Even so, for the first six months of 2019, an average of 172,000 jobs a month have been added as compared to 223,000 in 2018. Wages were up 3.1 percent from a year earlier and the labor force participation rate was 62.9 percent compared to 62.8 percent in May. President Trump hailed the report, saying, “Our country’s doing unbelievably well economically.” He also once again said growth “would be like a rocket ship” if the Fed would lower its rate. The Fed’s Chairman Jerome Powell will appear on Capitol Hill this week before both the House and Senate to discuss the Fed’s policymaking and to field questions.

New nominees for the Fed

President Trump said he was going to nominate Judy Shelton and Christopher Waller to serve as Fed governors. Shelton is an economic adviser to President Trump who has been critical of the Fed and called for lower rates, as well as a return to the gold standard. Waller is currently in charge of research for the Federal Reserve Bank of St. Louis. The president’s two previous prospects, Herman Cain and Stephen Moore, both withdrew before being officially nominated.

The longest expansion on record

On Jul. 1, the U.S. economy hit a new milestone: the longest economic expansion since recordkeeping began in 1854. As of last Monday, the economy had grown for 121 months, eclipsing the previous streak that lasted from March 1991 to March 2001.

New leaders for the European Central Bank (ECB) and the European Commission (EC)

Two of Europe’s top jobs will change hands later this year and, for the first time, women will step into positions previously held only by men. Christine Lagarde, who has been the Managing Director of the International Monetary Fund since 2011, was nominated to succeed Mario Draghi as President of the European Central Bank. And Ursula von der Leyen, Germany’s Defense Minister, will take over for Jean-Claude Juncker as the President of the European Commission. The two new leaders will have to manage the economic slowdown in Europe and Brexit, among other challenges.

Oil cuts to continue, the trade gap widens

As expected, the Organization of Petroleum Exporting Countries (OPEC) made a deal with Russia and nine other non-OPEC oil producers to continue to reduce output by 1.2 million barrels a day “indefinitely.” In other news, the Institute for Supply Management said that its manufacturing index fell from 52.1 in May to 51.7 in June; any reading above 50 indicates growth. The ISM’s nonmanufacturing index dipped to 55.1 in June from May’s 56.9. Despite tariffs, the trade gap rose by 8.4 percent in May from April to $55.52 billion, as imports were up 3.3 percent, the fastest pace since March of 2015. The gap with China rose 12.2 percent to $30.2 billion. Construction spending was down 0.8 percent in May from April. Factory orders were off 0.7 percent in May from April; orders ex-transportation were up 0.1 percent. And first-time jobless claims for the week ending Jun. 29 fell 8,000 to 221,000; the four-week moving average rose 500 to 222,250.

A look ahead

This week’s updates will include the latest on consumer credit, the small business optimism index, job openings, wholesale inventories, and the consumer and producer price indexes. The Fed will also release the minutes of its June meeting.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.