Key Market Data
|07/05/2019||07/12/2019||One Week Change||YTD||One Year|
|S&P 500 Index||2,990.41||3,013.77||+0.78%||+21.54%||+9.89%|
|MSCI EAFE Index||1,932.13||1,921.45||-0.55%||+14.51%||+1.28%|
|Barclays Capital U.S. Aggregate Bond Index||2,168.50||2,163.87||-0.21%||+5.73%||+7.19%|
|10-year Treasury Note Rate||2.035%||2.123%||+8.8 basis points||-56.2 basis points||-72.4 basis points|
- The Dow passed 27,000 points on Thursday and the S&P 500 breached 3,000 on Friday, both firsts.
- The consumer price index rose 0.1 percent in June from May; core CPI increased 0.3 percent, an 18-month high.
- Wholesale inventories were up 0.4 percent in May from April and 7.7 percent from a year earlier.
More certainty that the Fed will cut rates later this month was good news all around for investors. Stocks rocketed to new records, the price of crude oil rebounded, and bond yields rallied from recent lows.
President Trump has repeatedly claimed that a lower rate from the Federal Reserve would be “rocket fuel” for the American economy, and while that has yet to be proved, it turns out that even the prospect of a rate cut can send the major stock indexes into the stratosphere. Last week, the testimony of Fed Chairman Jerome Hill on Capitol Hill and minutes from the Fed’s June meeting convinced investors that the Fed would most likely cut its rate when it meets at the end of this month. As a result, all three indexes finished the week at record highs, with the Dow passing the 27,000-point mark for the first time on Thursday and the S&P 500 closing above the 3,000-point mark Friday. The Dow’s Thursday surge was also driven by a spike in the shares of healthcare companies after President Trump said he would rescind his recently announced decision to eliminate rebates for government drug plans.
U.S. crude prices jumped 4.5 percent last week to finish back above $60 a barrel just a month after falling into a bear market. Hurricane Barry also drove oil higher based on the potential disruption at Gulf Coast refineries.
Bond yields rallied from recent lows after having dipped below 2 percent, with the yield on the 10-year Treasury settling at 2.12 percent on Friday.
Powell speaks, minutes and members back him up
Investors spent the first half of last week biding their time while waiting to hear Fed Chairman Jerome Powell’s testimony before the House and Senate. When he spoke, the message was loud and clear: Despite June’s strong jobs report and the truce in the trade war between the U.S. and China, the economy is facing headwinds and the Fed is ready to act to maintain what is now the longest expansion in U.S. history. On Wednesday, Powell told the House Financial Services Committee, “The bottom line for me is the uncertainties around global growth and trade continue to weigh on the outlook.” That, along with weak inflation, “strengthened the case for a somewhat more accommodative policy.”
The minutes of the Fed’s June meeting, at which it held steady on rates, showed that Mr. Powell’s fellow committee members had the same concerns about a cooling economy and discussed the possibility of a rate cut in the near future “should these recent developments prove to be sustained and continue to weigh on the economic outlook.”
After his testimony, Mr. Powell’s fellow Fed members helped the market along by echoing his remarks. On Thursday, Fed Governor Lael Brainard said she’d argue for “softening the expected path of monetary policy” because of “downside risks,” and on Friday, Charles Evans, the President of the Federal Reserve Bank of Chicago, said he expected two rate cuts this year to help combat low inflation.
The European Central Bank (ECB) is also on alert
The Fed was not alone in standing ready to act. The minutes of the ECB’s June meeting also released last week, likewise indicated that the ECB was leaning toward additional stimulus because of the “heightened uncertainty which was likely to extend further into the future.”
The trade truce; China’s GDP slows
Though negotiations have restarted, on Thursday President Trump tweeted that China was “letting us down” by not buying agricultural goods as promised when the two sides agreed to recommence trade talks.
Meanwhile, reports from China showed that the trade war has been taking a toll. Exports declined 1.3 percent in June from a year earlier, while imports were off 7.3 percent. The drop-in business with the United States was even more precipitous, with exports declining 7.8 percent from June of 2018 and imports plummeting 31 percent. And yesterday, China announced that its second-quarter GDP was 6.2 percent, its slowest pace since 1992.
Also last week, Huawei, which has been the target of U.S. sanctions (some of them currently on hold per the trade truce), said it was going to begin laying off hundreds of workers at its American facilities. This came after Commerce Secretary Wilbur Ross explained that American companies could sell their products to Huawei as long as there was no risk to national security, while Treasury Secretary Steven Mnuchin reportedly encouraged U.S. tech companies to apply for exemptions so that they could continue to sell to Huawei.
The debt ceiling
Mnuchin sent a letter last week to the House Minority Leader Nancy Pelosi (D, CA), warning that, based on “updated projections,” the government may run out of cash in early September, urging her to raise the debt ceiling before Congress began its summer recess on Jul. 26. Pelosi responded with a letter of her own saying any agreement “should provide equal increases in the defense base and the non-defense base over the next two fiscal years.”
At the same time that regulators, including Powell, are expressing concern about Libra, Facebook’s proposed cryptocurrency, the Federal Trade Commission had more bad news for the company, announcing a $5 billion fine for violating the privacy of its users. In other news, the consumer price index was up 0.1 percent in June from May and 1.6 percent over the past year; core CPI, excluding food and energy, rose 0.3 percent for the month, its biggest month-over-month gain since January of 2018, and 2.1 percent from a year earlier. The producer price index climbed 0.1 percent in June from the month before and was up 1.7 percent for the year; core PPI was unchanged from May and advanced 2.3 percent for the year. The National Federation of Independent Business’s small business optimism index dipped to 103.3 in June from May’s reading of 105. And first-time jobless claims for the week ending Jul. 6 tumbled 13,000 to 209,000; the four-week moving average fell 3,250 to 219,250.
A look ahead
This week’s updates will include the latest on import and export prices, industrial production and capacity utilization, business inventories, housing starts and building permits, the Fed’s “Beige Book” report, the Conference Board’s leading index, and consumer sentiment. The second-quarter earnings season will also begin in earnest, with FactSet estimating that earnings for S&P 500 companies will decline 0.3 percent.
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.