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Week in Review

Week Ending: Friday, June 29, 2018

Recap & Commentary

Markets ended the week lower, as investor sentiment seemed to shift from concerns about the threat of a trade war to the acknowledgment that one is now fully underway. Those tensions were further inflamed by a report that President Trump is considering withdrawing the U.S. from the World Trade Organization (WTO). At this stage, the actual dollar amounts of announced tariffs, while large in absolute terms, is rather immaterial compared to the size of the broader economy. However, there are growing concerns about the secondary and tertiary impacts that tariffs could have on global supply chains. In addition, the longer the trade war drags on, the greater the likelihood that it begins to impact business sentiment which, in turn, could lead to slower economic growth.

Largely lost among the headlines was a further decline in the Chinese yuan, and the Shanghai Composite entering bear territory, down –20%. Both of those factors have weighed on the broader emerging markets complex of late, along with recent strength in the dollar, rising interest rates, and fears of a global trade war.

Economic Bullet Points

Inflation— Core PCE (the inflation measure closely watched by the Fed) accelerated to 2% in May, matching the Federal Reserve’s target after hovering below that mark since April 2012. Economists don’t expect the Fed to become more hawkish via rate increases and suggested the group can tolerate core PCE levels as high as 2.5%.

Housing— New home sales surged 6.7% to a seasonally adj. 689K in March from April, beating consensus expectations, led by a 17.9% increase in sales in the South. The spike in new home sales was driven by the historically low inventory of existing homes in the market. Note that new home sales are a small slice of total US homes sales, and the data is volatile. May’s gain came with a 14.1% margin of error.

Durable Goods Orders— The core reading (nondefense ex-aircraft) decreased -0.2% in May after a strong April increase. Growth in business capital investment remains much weaker than expected as the significant tailwind from corporate tax cuts is being offset by uncertainties associated with the ongoing global trade war.
International Trade in Goods— US exports surged 2.1% in May despite the global trade war. The US trade deficit fell to a lower-than-expected -$64.8B.

GDP— The third estimate for Q1 real GDP decreased to 2.0% from the prior 2.2% estimate, after contributions from inventory growth, net exports, and consumer spending were adjusted lower. The GDP price index, another measure of inflation, however, remained unchanged at a 1.9%.

Corporate Profits— After-tax corporate profit growth was revised up to an annualized 2.7%, besting the initial 0.1% expectation. Specifically, after-tax profit (adj. for inventory valuation and capital consumption allowances) reached a record $1.9T, up 17% from a year ago, ~10% of GDP—a level exceeded in only four quarters in history.

The Consumer— Sentiment, confidence, and spending indicators remained elevated, but levels have moderated. This trend is expected to continue through year-end.

Jobless Claims rose 9K to 227K vs. the 220K estimate—an overall positive reading.

Of Note

  • In another anecdotal sign of tight labor market conditions, the National Federation of Independent Businesses reported the largest percentage of small business raising compensation in 34 years in May.

Market Indices Week of 6/29

S&P 500                       -1.3%

Russell 2000                 -2.5%

MSCI EAFE                   -1.1%

MSCI EM                       -1.7%

Commodities                0.1%

Barclay’s Agg.               0.3%

US Dollar Index            0.1%

10-Yr Yield                    2.85%

WTI Oil ($/bl)                   $74

Gold ($/oz)                    $1,250

The Week Ahead

  • PMI Manufacturing Index
  • ISM Mfg. Index
  • ISM Non-Mfg. Index
  • Factory Orders
  • International Trade
  • Jobless Claims

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