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  • June 3, 2019

Week in Review

Week Ending: May 31, 2019

Recap & Commentary

Continued trade tensions resulted in a fourth consecutive weekly loss for the S&P 500. Bond yields fell as investors sought the relative safety of bonds, pushing the 10-Year Treasury yield to 2.13%, its lowest level since 2017. The decline widened the current inversion between the 10-Year Treasury and 3-Month T-Bill to -0.22%, the largest negative spread since 2007. Interestingly, the 2-10 spread, the difference between the yields on the 2-Year and 10-Year Treasuries rose slightly to end the week at 0.20%. In response to the concerns about slowing growth, expectations for a Fed rate cut by year end surged, ending the week at 91% for one rate cut, and 61% for two rate cuts.

Responding to recent decisions by the U.S. to increase tariffs on $200B of Chinese goods and effectively ban Chinese telecom giant Huawei from U.S. markets, China hinted at several retaliatory moves. The first would restrict exports of rare earth elements; minerals essential to the production of high tech devices including cell phones, cars, and defense applications such as lasers, and missile guidance systems. China is the leading producer of rare earths, accounting for 70% of global supply in 2018, according to the U.S. Geological Survey. China also announced plans to blacklist “unreliable” entities that violate market rules or block supplies to Chinese companies for “non-commercial reasons”. Such a ban could impact numerous  U.S. companies.

Tensions between the U.S. and Mexico spiked after President Trump announced a 5% import tariff on all Mexican goods beginning June 10. The tariff will increase 5% per month thereafter, until reaching 25%, or until Mexico takes actions to alleviate the “illegal migration crisis”. In 2018, U.S. companies imported $346.5B in goods from Mexico, the U.S.’s largest trading partner.

Economic Commentary

GDP—Q1 real GDP growth was revised down to a 3.1% annual rate from an initially reported 3.2%. The decline was due mostly to softening business (CapEx) spending. Tax reform boosted CapEx in 1H 2018, but with the stimulus effect fading, in addition to a deepening trade war and weakening business confidence, CapEx growth is now running at the slowest pace since Q4 2016.

Consumer Spending picked up measurably in both March and April after a soft start to the year, with a two-month gain, as strong as the economy has seen in seven years. At this pace, Q2 consumer spending could come in north of 3%.

Corporate Profits—After the best profit growth in six years last year, US corporate profit growth slowed in the first quarter. As the year progresses, the more moderate pace of economic growth and the extraordinarily tight labor market are expected to exert more downward pressure on overall profit growth.

Consumer Confidence rose to a greater-than-expected 134.1 in May, in spite of the global trade war. Interestingly, consumers’ take on the present situation is now higher than any previous point in this cycle. Expectations rose as well.

Of Note

EU Parliamentary elections saw nationalist parties increase their share of seats from 20% to 25%. However, that “nationalist wave” that some feared, failed to materialize. The elections also saw a significant increase in overall voter turnout, surpassing 50% for the first time since 1994.

Market Indices Week of 5/31

S&P 500                          -2.6%

Small Caps                     -3.2%

Intl. Developed              -1.5%

Intl. Emerging                0.8%

Commodities                  -1.3%

U.S. Bond Market            0.5%

10-Year Treas. Yield         2.13%

US Dollar                          0.2%

WTI Oil ($/bl)                      $53

Gold ($/oz)                     $1,306

The Week Ahead

  • PMI/ISM Manuf. Data
  • Factory Orders
  • Construction Spending
  • PMI/ISM Services Data
  • International Trade
  • Employment Situation Report

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