It was a flight to quality holiday shortened week driven primarily by the uncertainty surrounding U.S. trade ‘negotiations’ with global counterparties. Risk markets are coming to terms with the notion that long-established stability and incremental negotiations in international trade policy are no more. Bond yields, U.S. treasury rates, and oil all fell sharply while select emerging market equities, the USD, and gold exhibited some resilience.
- POTUS announced broad based tariffs (5% escalating to 25%) on Mexican imports in relation to border/immigration policy. Markets churned. The U.S. has never used blanket tariffs against another country and POTUS authority to do so is in question.
- Increasing risk of global economic disruption stemming from trade policy and high inventories have taken WTI to its largest decline in six months.
- The 3m/10y yield curve slope touched -0.17% last week, becoming more of a notable concern and credit spreads, having failed to fully confirm the recent equity market record highs, are not signaling confidence.
- Fed funds futures are now pricing in over 70% likelihood of over 50 bps reduction before January 2020.
- Semis, transports, energy, and retailers are in a coordinated downtrend at this time.
- Economic surprise indices (U.S.), jobs numbers, improving forward earnings guidance, bank CDS, homebuilders, and washed out investor sentiment are all solidly in the ‘positive’ side of the ledger.
- The DJIA just completed its sixth consecutive losing streak. There have only been 7 occurrences of 7 losing weeks and 1 occurrence of 8 losing weeks.
- Both the 200 DMA and 2800 support level were broken last week.
- The S&P 500 dividend yield of 2.1% versus the 10yr U.S. Treasury yield of 2.16% has stocks looking much more compelling relative to bonds here in the May selloff.
Economic Release Highlights
- The second estimate of Q1 GDP brought growth down 0.1% to 3.1%. Consumer spending moved marginally higher while business and residential investment moved marginally lower.
- April core PCE moved slowly in the right direction, up 0.1% to a 1.6% annual clip. Headline annual PCE also moved 0.1% higher to 1.5%. The data doesn’t translate to much rate-cut pressure on the Fed.
- April income climbed 0.5% despite softening in the wage/salary component.
- April consumer spending rose a bit more modest than expected at 0.3%.
- Case-Shiller HPI (3m average) showed home prices flattening out more than expected in March, at only a 0.1 percent increase. Year-on-year growth fell 3 tenths to 2.7 percent which is a 7-year low.
- May consumer confidence beat expectations and improved to 134.1, its best showing since November last year and in line with the mid-month jump posted in the consumer sentiment report.