Week in Review
Week Ending: Friday, June 21, 2019
Recap & Commentary
Markets ended the week higher, bolstered by more accommodating language from both the U.S. Federal Reserve and European Central Bank (ECB). The result was a new record high for the S&P 500, while bond yields fell to multi-year lows. The apparent cognitive dissonance between the outlooks of equity and fixed income markets left many investors wondering “Who is right?”
In some respects, the answer depends on whether investors view the proverbial cup as being half full, or half empty. Equity investors clearly seem to believe it is the former, heartened by the belief that both the Fed and ECB are prepared to take necessary actions to sustain the current economic expansion. Bond investors, however, seem to believe that it is the latter, that economic growth is slowing enough to warrant monetary intervention. As is typically the case, the answer likely lies somewhere in the middle. While we agree that economic data has moderated, we do not view it as signaling an imminent recession.
Following its June meeting, the Fed removed language from its accompanying statement about being “patient” with respect to monetary policy. Speaking at his press conference after the meeting, Fed Chair Jay Powell stated that “In light of increased uncertainties and muted inflation pressures” the Fed will “act as appropriate to sustain the expansion.” That was enough to push market expectations for a rate cut in July to 100%, up from 25% just a month ago. Market expectations for one, two, and three rate cuts by year end now stand at 100%, 95%, an 65%, respectively.
Economic Bullet Points
Leading Indicators—After two modest monthly gains, the index of leading economic indicators, a composite of ten forward-looking components, was flat in May. The index has been flat, more or less, since September of 2018, which suggests that US economic growth is likely to continue, but at a moderate pace.
The Housing Market Index, a gauge of builder opinion on the relative level of current and future single-family home sales, came in slightly lower-than-expected in June. However, its reading of 64 indicates that builders remain optimistic. The index is a diffusion index, which means that a reading above 50 equates to a favorable outlook on home sales.
Existing Home Sales increased 2.5% to a 5.34 million annualized pace in May. Resales continue to gradually improve alongside declining mortgage rates and an upturn in mortgage applications. However, sales are down -1.1% year to date, but the overall trend is showing improvement.
Housing Starts fell -0.9% in May. Despite the drop, prior month’s data were revised higher, and single-family permits rose for the first time in six months.
Jobless Claims fell -6K in the June 15 week to 216K which is at the low end of consensus estimates. Continuing claims for the June 8 week fell -37K and the 4-week average has fallen -5.3K. In sum, labor market data remains robust.
U.S. oil prices surged over 9% for the week, due in large part to concerns of a military confrontation between Iran and the U.S., following the downing of a U.S. military drone by Iran. Recent attacks on oil tankers in the Straits of Hormuz, through which 1/3 of all shipped oil passes, have also pressured prices.
Market Indices Week of 6/21
S&P 500 2.1%
Small Caps 1.8%
Intl. Developed 2.2%
Intl. Emerging 3.8%
U.S. Bond Market 0.4%
10-Year Treas. Yield 2.05%
US Dollar -1.4%
WTI Oil ($/bl) $57
Gold ($/oz) $1,396
The Week Ahead
- Corporate Profits
- New Home Sales
- Durable Goods Orders
- Intn'l Trade in Goods
- Consumer Sentiment
- Jobless Claims