Equity markets moved marginally higher last week on relatively light volume while interest rates were flat. We’d categorize last week as a breather after the sharp bounce higher off the June 3rd lows. Investors are looking anxiously at the forward calendar with the upcoming G20 summit (trade) and FOMC meeting (rates). Market oriented headlines last week included a new conflict occurrence in the Persian Gulf and further speculation about Fed rate moves. The economic calendar was fairly light and represented the last few data points for Fed consideration leading into this week's FOMC meeting.
- Markets have two macro tensions rippling with trade conflict(s) and rising geopolitical risks in the Persian Gulf.
- SOX, a notable leading indicator, has some headwinds with a Broadcom warning, Huawei sanctions, and overall global growth slowdown.
- The Fed (Powell’s) unenviable task of reconciling market rate expectations with Fed policy begins in earnest this week. Markets are not expecting a move in June but have a strong 85% probability of a 25bps cut at the July 31 meeting - this was < 25% three weeks ago.
- CPI, PPI, and import prices all exhibited downward momentum last week.
- The OECD CLI reading of 99.03 is in its 17th consecutive month of declines, highlighting the challenges facing non-U.S. economies.
- Weekly jobless claims (222k) are on a record 223rd consecutive week of less than 300k and 74 weeks (record is 89) of less than 250k.
- One interesting observation from the U.S.-Sino trade war is that import prices from China fell 1.4%. Overall volume from China has fallen sharply while volume from Vietnam/Mexico has spiked. Bespoke highlights CAT as the best U.S. proxy of trade war disruption.
- The yield curve has now been inverted for 16 days but the depth of inversion (11bps) has declined meaningfully since the June 3rd wide (28bps).
- High yield spreads have fallen during the June recovery. They got as high as 470 on June 3rd but have recovered to 424 since.
- Beware of consensus. WSJ chart last week illustrated 10yr U.S. treasury yield predictions from late 2018. Not one of 35+ predicted a yield < 2.5% by June 30 and most were clustered around 3%. Prediction markets (Brexit, Trump) all play into the same consensus skepticism.
Economic Release Highlights
- May CPI of 1.8%/2.0% (headline/core) was benign and even lost pace, falling short of estimates on the month over month basis.
- May retail sales of 0.5% missed consensus calls for 0.7% but a sharp 0.5% upward revision to April and beats on the three remaining sub-components painted a more encouraging picture.
- May industrial production beat expectations on the headline number (+0.4%) and met consensus with the manufacturing sub-component (+0.2%).
- Preliminary June consumer sentiment (97.9) fell from May levels and missed expectations. Falling long-term inflation expectations was the biggest takeaway here for FOMC observation purposes.
- May PPI registered soft but passable 0.1% MoM and 1.8% YoY gains. Core readings held up better and are running at 2.3% YoY.
- May JOLTS showed an increase in job openings (7.449mm) and hires couldn’t keep up. The quit rate and openings to hires gap of 1.752mm have both been holding steady since late last year.
- NFIB Small Business Optimism index posted a strong gain for the second month in a row to 105, topping expectations - not showing deterioration from trade tensions.