In the lead up to the Memorial Day holiday weekend, equity markets voted to cheer the week’s strong economic data rather than fear the potential Fed rate hike response to that same economic data. The S&P 500 climbed 2.3% for its best week in the last three months. The upward move took the S&P 500 back to what has been a clear resistance level of 2,100 over the past year.
Bond yields and spreads didn’t move much either way last week while crude oil rose nearly 2%, briefly touching $50 for the first time in seven months. Since making its bear market low on February 11th of $26.21, crude oil has rallied 89.1%. Meanwhile, high yield bond spreads (vs. Treasuries) have dropped by over 30% from 887bps to 608 bps over the past four months, indicating that bond investors are much more comfortable with credit risk now than during the market volatility in the beginning of the year. Much of the improvement in spreads is attributable to a 50% fall in spreads across the high yield Energy sector (1,984 bps to 964 bps). As a bit of reference, the entire high yield market traded at 2,147 at the peak of the global financial crisis in early 2009; close to the bearish levels the market was earlier this year on energy. Of interest on the currency front is that since its intraday low in early May, the USD is up over 4% on new speculation of Fed rate hikes and more encouraging economic data.
Last week was a relatively active week for economic data. Generally speaking, manufacturing data largely missed expectations while employment and housing related reports were positive. With 28 indicators on the slate for this coming week, it is safe to assume that we should have a much clearer read on June FOMC rate hikes after this week. Economic highlights last week included a slight upward revision to 1Q GDP (0.5% to 0.8%) as well as an upward estimate for 2Q GDP from the Atlanta Fed (2.5% to 2.9%). Additionally, encouraging reports on durable goods (+3.4%), a new home sales figure that registered its highest reading (619,000) since 2008, and as a big jump in median home prices to a record $321,100 all worked to set the narrative on the upcoming June 14-15 FOMC meeting. The upcoming June 23rd referendum in the U.K. which will decide whether or not to leave the European Union is also garnering much market attention.
