Economic Update 6-18-2018
- Economic data for the week was dominated by the U.S. Federal Reserve raising short-term interest rates by a quarter point. Otherwise, retail sales and manufacturing showed strong gains, as did jobless claims and consumer sentiment, while inflation rose mostly due to higher oil prices.
- U.S. equity markets rose slightly last week, and outperformed foreign stocks, which were held back by a stronger dollar. Bonds were similarly flat, with minimal changes to interest rates during the week, while foreign bonds also lagged. Commodities fell across the board, including the price of crude oil on expected higher production.
U.S. stocks ticked slightly higher for the week, with small caps again outperforming large caps—with the former setting more all-time records during the week before falling back. Weakness later in the week coincided with lower oil prices and continued tariff threats and near-implementation deadlines for over $50 bil. in Chinese goods, with a far higher number being thrown around for additional tariffs in coming weeks. From a sector perspective, defensive utilities recovered from the prior week with gains over +2%, followed by both consumer staples and discretionary stocks. Energy fared worst, losing -3% with oil prices falling back. Year-to-date, cyclicals and technology remain neck-and-neck in the lead, while staples and utilities have lagged with negative returns as defensive segments have not been sought after amidst rising interest rates and higher commodity prices.
Developed market foreign stocks ended the week with stronger returns than in the U.S. in local terms, but these turned negative due the stronger dollar—with Europe ending best, while emerging markets fared worst. The ECB announced that it would be winding down its quantitative easing program by the end of 2018, including a tapering process that involves buying fewer bonds during the fourth quarter; however, they also noted that they’re ‘likely’ to keep rates low into next year. All-in-all, this approach is very similar to that taken by the U.S. Fed in prior years. However, the timing came as somewhat of a surprise due to some softer data coming out of Europe in recent months. The Bank of Japan also met, and kept rates at zero, based on the difficulty in reaching their 2% inflation target. Emerging markets were hit hardest, with sentiment impacted by the Fed action to raise U.S. rates and continued uncertainty over the effects of a tariff war instigated by the U.S. The worst performing nations included Brazil, where the economy has been hit by the effects of a truckers’ strike, and Turkey, whose currency fell sharply versus the dollar. Asian equities also fared poorly, despite the initially positive reception to the U.S.-North Korean meeting last week (although expectations were tempered and denuclearization questions weren’t resolved), as sentiment was still driven by tariff issues.
U.S. bonds were flattish to slightly higher on the week, as the yield curve was little changed. High yield fared better, as spreads tightened a bit. Foreign bonds lost ground across the board, with the dollar strengthening by more than 1%, sharply weighing on USD-investor returns, with recently beaten-up local currency emerging market debt faring worst yet again. Unfortunately, many emerging market economists and debt managers have claimed that conditions were different this time, and indeed, emerging market nations on average are of a higher credit quality and feature greater stability than they did in decades past. However, EM debt has been punished as the U.S. dollar has shown strength, and U.S. interest rates have inched higher—just like in prior cycles.
Real estate generally declined last week, with U.S., European and Asian regions all performing similarly. More cyclical lodging REITs fared worst, while health care, mortgage and retail all suffered minimal losses.
Commodities lost ground as a whole last week—another victim of the stronger dollar—with losses in energy, industrial metals, agriculture, and to a lesser degree, precious metals. Crude oil prices initially drove higher, but settled to a -1% decline overall to just over $65/barrel, as some anticipate higher production goals to be set at OPEC’s meeting this week and reports have shown that U.S. oil production and exports have already begun to ramp up.
|Period ending 6/15/2018||1 Week (%)||YTD (%)|
|BlmbgBarcl U.S. Aggregate||0.13||-1.94|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.