Global central bank narratives last week drove bond yields higher and put a charge of volatility into equity markets. The tech selloff continued and interest rate sensitive sectors (utilities) struggled while energy stocks enjoyed a bear market bump in the price of oil. The yield curve steepened, which is probably a welcomed development for FOMC members looking to raise rates in September.
Your Weekly Anecdotals:
The CAPE Shiller P/E crossed above 30x for the third time in history this week (August ‘29 and June ‘97). 1929 is well documented. In June 1997, the markets rallied another 80% to a 43x C/S peak multiple in March 2000. 2017’s fate will be either up, down, or a long time sideways. In any case, the likely path will lead to below average U.S. equity market returns from here forward.
So much for the single EU rulebook. The EU allowed Italy to break EU rules introduced just last year and bail out a failed bank with taxpayer dollars, rather than shareholders taking the hit. With the anti-Euro 5-Star movement polling 30% approval ratings, it’s likely the EU is keen to avoid angering the Italians. Most experts predict more Italian bank failures will follow. EU hit Google with a $2.7B fine for violating antitrust laws. The E.U. antitrust chief said Google illegally steered search results toward its comparison shopping service.
The U.S. oil rig count finally blink last week in the face of declining oil prices, clocking its first weekly decline since January, ending a streak of 23 consecutive positive weeks.
There may have been a ‘fat finger’ trade in the gold futures market on Monday, likely the result of somebody mistaking #ounces for #lots. Trading jumped to 1.8mm ounces of gold in one minute (18,149 lots) and then quickly dropped back to normal range of 2,334 lots.
FactSet S&P 500 estimate for blended 2Q earnings growth is a respectable 6.5%. Removing energy’s 401.3% earnings growth and the number falls to a more pedestrian 3.6%. +Markets became anxious that the BoE and ECB will join the Fed and begin to normalize monetary policy. A hawkish speech from Mario Draghi triggered a surge in stock volatility and global bond yields. After his speech, the probability for a June 2018 ECB rate hike jumped to > 50% and the Euro surged. ECB VP Constancio immediately hit the speaking circuit to say the markets misinterpreted Draghi’s comments. The BoE also ordered higher capital requirements from banks, another monetary tightening move.
Eurozone core CPI increased to 1.1% from 0.9% and German May retail sales increased 0.5% m/m; 0.3% was expected. Interest rates responded with 1-month LIBOR closing out the first half at an 8-year high of 1.23% and Germany’s 10-year bond marked its biggest weekly jump since December 2015 to 0.47%. The European bond market selloff reached stocks on Thursday recording the worst one-day drop in European equities since September.
Banks passed the Fed’s stress test last week which unleashed a windfall of $390 billion in stock repurchases that singlehandedly changed a 9% yoy decline into a 3% yoy increase. According to Birinyi Associates, JPMorgan, Citi, and Bank of America’s $92.8 billion total set a single-day record on data that goes back to 1984.
Your Weekly Economic Updates: +The final reading on Q1 GDP was revised higher, from 1.15% to 1.42%. Higher consumer spending on housing, healthcare and financial services, including insurance, drove the revision.
Core PCE, the inflation indicator closely watched by the Fed fell to 1.4% annual clip in May, a third decline in a row for the yearly rate and the weakest showing in 1 ½ years, loosening the argument for a September rate hike.
May U.S. durable goods were disappointing with commercial aircraft and other capital goods falling 1.1% versus expectations for a -0.4% decline.
The headline Consumer Confidence reading that was released this week came in very strong at 118.9., well above the long term average of 93.8.
The Citi U.S. economic surprise index moved up slightly last week after plunging from multi-year highs in Q1 to multiyear lows in June. The Global (non-U.S.) index is still much more constructive than the U.S.
