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Week in Review

Week Ending: Friday, May 25, 2018

Recap & Commentary

US Stocks were flat-to-modestly increased in a week of light trading as investors wrestled with the latest trade negotiations between the US and China. On Monday, Treasury Secretary Steve Mnuchin commented that the two sides had “declared a truce” and agreed to suspend their respective multi-billion dollar tariff proposals with the caveat that negotiations meaningfully progress toward a formal deal. Concurrently, China pledged to buy more US products and cut its import tariffs on US autos to 15%, and the US agreed to grant a reprieve for ailing Chinese telecom giant ZTE Corp. Last month, US companies were banned from selling to ZTE after the company violated trade sanctions against Iran and North Korea. The US action would likely have put ZTE out of business.

Despite the favorable trade negotiation updates, markets remained wary of the risk that President Trump might unilaterally impose import tariffs if he objects to the outcome of the negotiations. Also weighing on the market’s mood was President Trump’s decision to cancel his upcoming summit with North Korean leader Kim Jong-Un.

The Fed  Minutes from the policy meeting earlier in the month eased investor concerns of more aggressive monetary tightening actions and lifted markets on Wednesday after policymakers appeared to be more comfortable with the prospects of inflation temporarily running slightly above their long-term 2% target.

International Stocks continued to underperform US shares as concerns reverberate regarding the health of emerging markets, geopolitical tensions in Asia, and the pace of European growth. YTD, the rising US dollar and strong corporate earnings have made the US a more attractive market for investors.

Economic Bullet Points

Home Sales – Both new and existing homes sales declined in April. Inventory shortages, resulting in rising prices and rising mortgage rates, have been substantial headwinds for the housing market. Specifically, the average sales price for a new home rose to $407K in April, the highest price on record dating back to 1963. Meanwhile, the supply of new homes hovered at 5.4 months at the end of March, down from around 6.0 months less than a year ago. Existing home prices have also increased, up 5.3% Y/Y, and supply, especially at the lower price points, has tightened markedly. Furthermore, according to Freddie Mac, mortgage rates have risen in 15 of the 21 weeks so far this year, the highest share since Freddie began tracking the data in 1972. The average 30-year, fixed-rate mortgage was 4.66% in April, up from 4.03% in January, and 3.99% at the end of last year.

Business Investment – At the headline level, Durable Goods Orders fell 1.7% in April. Excluding a 29% decline in aircraft orders which tend to be volatile, core business spending actually rose a better than expected 1.0%. However, the prior month was revised down to –0.9% from an initial reading of –0.1%. Nonetheless, April’s data bodes well for second-quarter economic activity.

Consumer Sentiment came in slightly below consensus as skepticism emerged about whether or not wage gains will increase enough to offset expected inflationary pressures and rising rates.

Of Note

While volatility has been higher YTD, stocks have moved into positive territory for the year. Dating back to 1950, 94% of the time the S&P 500 is higher for the year to close out the month of May, it goes on to post a full-year gain.

Market Indices Week of 5/25

S&P 500                       0.3%

Russell 2000               0.2%

MSCI EAFE                 -1.6%

MSCI EM                     -0.1%

Commodities             0.6%

Barclay’s Agg.             0.7%

US Dollar Index         0.6%

10-Yr Yield                  2.93%

Oil ($/bl)                        $68

Gold ($/oz)                $1,304

The Week Ahead

  • Consumer Confidence
  • GDP
  • Jobless Claims
  • PMI Manufacturing Index
  • ISM Manufacturing Index

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