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Week in Review

Week Ending: Friday, June 1, 2018

Recap & Commentary

Domestic equity markets shook off concerns about Italy’s political chaos and a trade war with European and North American allies, ending the week higher. This was further boosted by Friday’s strong employment report.

Global equity markets were rattled on Tuesday after Italy’s president rejected the formation of a Eurosceptic coalition government, raising the possibility of new elections. In response, investors bid up safe-haven assets which led to the 10-Year Treasury yield experiencing its largest one-day drop in nearly two years. By week-end, concerns about Italy appeared to have largely dissipated after the president approved a reshuffled cabinet. Fears remain, however, that the new government’s anti-EU stance will lead to increased volatility.

After granting the EU and NAFTA partners Mexico and Canada a reprieve from steel and aluminum tariffs through May, President Trump announced that he would allow tariffs to take effect on Friday, June 1.  In response, the three trading partners announced their own counter-measures. The EU also said it would file a complaint against the U.S. with the World Trade Organization.

In a related move, the president said that he would proceed with tariffs on $50B of Chinese goods. The announcement may have been made to gain leverage in ongoing trade talks. However, the latest round of talks, held over the weekend and led by U.S. Commerce Secretary Wilbur Ross, ended with few visible signs of progress. At the conclusion, Beijing issued a statement saying that any trade and business deals reached with the U.S. would be void if the U.S. went ahead with tariffs. 

Economic Bullet Points

Home Prices, as measured by the Case Shiller Home Price Index, rose 0.5% in March from the prior month. On an annual basis, prices were up 6.8%, unchanged from February.  Economists attribute rising home prices in 2018, especially in the West, to a lack of homes for sale. Until inventories increase faster than sales or the economy slows significantly, home prices are likely to continue rising.

Consumer Confidence readings are holding onto this year’s gains, aided by the strength of employment assessments and after-tax income prospects.

GDP – The second estimate for first-quarter GDP is expected to come in at a 2.2% annualized rate, versus 2.3% in the first estimate. The contribution from inventory growth is expected to be softer but offset by a possible upgrade to consumer spending. Expectations are at a 1.2% rate, versus 1.1% in the first estimate. The GDP price index, another measure of inflation, remained unchanged at a 2.0%.

Jobless Claims – U.S. unemployment fell to 3.8%, its lowest level since April 2000, as U.S. hiring exceeded expectations.  Nonfarm payrolls added 223k jobs in May, more than the expected 190k. Hourly wage growth was relatively modest, up 2.7% Y/Y.

ISM manufacturing data for May was strong, rising from April’s level and exceeding expectations.  Underlying strength was broad-based with production, employment, new orders, and backlog orders all registering gains.

Of Note

The Federal Reserve voted unanimously to advance a proposal to loosen the “Volker Rule” which bans banks from making speculative investments with their own capital.  The rule was written under the broader Dodd-Frank banking law which was enacted in the aftermath of the 2008-2009 financial crisis.

Market Indices Week of 6/01

S&P 500                         0.5%

Russell 2000                  1.3%

MSCI EAFE                    -1.1%

MSCI EM                       -0.6%

Commodities              -0.5%

Barclay’s Agg.               0.2%

US Dollar Index            0.0%

10-Yr Yield                    2.90%

WTI Oil ($/bl)                  $66

Gold ($/oz)                   $1,295

The Week Ahead

  • Factory Orders
  • ISM Services
  • International Trade
  • Productivity & Costs
  • Jobless Claims

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