Politics rippled through market psyche last week with tariff wars and possible preparation for conflict with Iran rippling through the headlines. Markets seemed more willing to absorb the stress after Monday’s 2%+ decline. Large cap U.S. markets finished -0.70% while small caps couldn’t recoup as much, finishing -2.37%. Interest rates fell across the curve leaving the 3m/10yr slope at exactly 0.00% while commodities posted gains, particularly grains (+9%) and oil (+1.8%).
- After Monday’s selloff, odds of a rate cut between now and the January meeting spiked to 80% with nearly a 40% of two cuts.
- President Trump deferred the imposition of auto tariffs for six months to give more time to negotiate with Japan and Europe.
- The U.S., Canada and Mexico have reached an agreement to remove the steel tariffs imposed last year.
- While equity markets have taken trade and armed conflict news in stride, FX markets are pricing in more risk as evidenced by the Yen carry trade (Yen/Aussie). $52.58t of negative yielding bonds as of May 17th across the global aggregate index are clear evidence of the ‘safety bid’.
- The updated Dalbar study on average investor returns reinforced the notion that sub-par returns are clear for the ‘average joe’. The 1998-2017 return of 2.6% pales to a standard 60/40 return of 6.4% and is only outpacing inflation (2.1%) across all major asset categories.
- Bespoke pointed out that China is not a massive production floor for the U.S. U.S. imports of Chinese goods (as % of China GDP) has fallen from 11% to 3.5% since the mid 2000’s.
- AAII bullish sentiment fell off a cliff since the tariff dispute re-emerged, down from 43.1% to 29.8% since recent market highs. Bearish sentiment spiked up to 39.3% from 23.19%.
- 10yr U.S. treasury yields are moving lower in acknowledgement of market pricing of forecasted Fed policy, currently pricing in more than 2 rate cuts over the next two years.
- NY Fed consumer survey on inflation expectations showed no significant downward skew. Percentage of respondents expecting 2% inflation is at a record high.
- Since mid-2018, it’s entirely those under 40 that have seen inflation expectations retreat. Others 2.5-3.0. 20’s, under 2%. >3% falling, <1% climbing.
- NY Fed report on consumer debt (mortgage, auto, credit card, HELOC, student loan) didn’t signal any above trend growth across all categories. Benign loan growth of 3.46% and declining delinquencies of 3.06% aren’t suggesting any flashpoints.
Economic Release Highlights
- April retail sales of -0.2% missed expectations and underlying components offered no silver linings. Control group growth of 0% points to decelerating consumer spending to start off Q2.
- April industrial production fell 0.5% and like retail sales, was not masking underlying strength.
- April housing starts rose 5.7 percent on the month to an annual rate of 1.235mm while permits gained 0.6 percent to 1.296mm. This was one of the best housing sector results this year.
- Home Builders grew more positive about conditions in May as the housing market index beat expectations and rose to 66.
- April NFIB Small Business Optimism Index moved firmly higher (+1.7) to 103.5.
- May preliminary consumer sentiment jumped to 102.4, a fifteen-year high and only the fourth over 100 in the expansion. This reading was recorded mostly prior to the trade fight escalation.
- Conference Board LEI/CEI ratio hasn’t made a new high since September 2018 but has recovered from 4Q falloff and has increased three months in a row.
- Global manufacturing activity maybe not yet bottomed. Japan machine tool orders (-45% 3m/3m) and industrial fasteners are -7.4% YoY (Fastenal) - both consistent with global ISM slowdown.
- Chinese Industrial production sagged 3% in April to 5.4% (6.5% YoY).
- Chinese property investment grew 10% YoY in April.
- Chinese retail sales grew 7.2% in April, the slowest rate since May 2003.