Weekly Economic Update

Economic Update 5-28-2019

  • Economic data for the week included slightly disappointing housing sales, and weaker durable goods orders, but jobless claims that remained status quo at a strong cyclical level.
  • Equity markets globally generally lost ground as trade tensions between the U.S. and China intensified. Bonds, as expected, fared well as investors fled from risk—pushing down interest rates. Commodities were mixed, with weather affects pushing commodity prices higher, while higher inventories and slowdown concerns damped sentiment for crude oil.

U.S. stocks started another week in the red as Google, in keeping with announced U.S. restrictions on trade with Chinese telecom firm Huawei, limited the firm to the public version of its Android system. However, a 90-day reprieve granted by American officials resulted in improved hopes for resolution, apparently, once potential damage to tech firm revenues was re-considered. Additionally, a $16 billion White House aid package for farmers received mixed reviews, as it implied the possibility of tariffs being in place for a longer stretch than previously thought. While equity sentiment bounced around through the week, the net result was negative.

From a sector standpoint, defensive utilities and health care ended with the only positive returns for the week; energy and technology were the worst performers. The latter were hit by oddly falling oil prices, and concerns over supply chain impacts of the Huawei decision weighed on the broader technology sector—notably semiconductors, which are sensitive to not only this end-buyer specific issue, but also the winds of global demand sentiment. Fears of a ‘tech cold war’ have cast a bit of a cloud over the group, due to the intertwined fortunes of consumer product end users and supply chains involving both the U.S. and China.

Foreign stocks behaved similarly to U.S. equities, with Europe, the U.K. and emerging markets experiencing similar losses—all again hinged on sentiment surrounding U.S.-China trade and implications elsewhere. In the U.K. specifically, the resignation of British PM Theresa May effective in early June again heightened uncertainty over Brexit negotiations going forward, with groups wanting a ‘soft’ Brexit and no Brexit at all continuing to battle to an impasse, while the probability of a ‘no deal’ appears to have fallen as of late. However, this is obviously a very fluid environment, with several momentum shifts and false starts since the original referendum, so assigning odds at any given time is futile.

Elsewhere in Europe, manufacturing numbers continued to show contraction, which has continued to dampen sentiment as hopes for a near-term recovery without additional stimulus appear mixed. The outcome of the EU parliamentary elections was also a wild card—however, when the ballots were tallied, pro-EU parties generally appeared to retain a majority, although more extreme parties gained ground over the more centrist block. (Interestingly, the newly formed U.K. ‘Brexit’ party took a third of the British vote; the irony of their participation in the EU is fairly ironic.) Japan fared a bit better, with only minor losses on the week, with economic growth for Q1 coming in at a positive annualized rate of over 2%, bucking expectations for a slight decline. In emerging markets, the proposed tech restrictions punished Chinese stocks, while the predicted outcome of the Indian election that kept reform-minded PM Mode in office, boosted markets in that region substantially.

U.S. bonds fared decently due to a movement in investor flows away from risk last week. The bellwether 10-year treasury saw another decline in yield to just over 2.3%, which is a benefit to financing (notably corporate refinancings and home mortgages tied to this bogey), but the opposite direction of where many strategists and economists thought rates would be at this point in the cycle—more like above 3%. Governments outperformed investment-grade corporates, while high yield and floating rate bank loans lost ground. A weaker dollar boosted returns for foreign bonds, which also benefitted from the ‘risk-off’ trade in developed markets, although emerging market debt also fared well.

Real estate bucked the trend by rising slightly for the week, falling in the gap between weaker equity prices and falling interest rates, which benefitted rate-sensitive assets. A weaker dollar served to help international real estate somewhat, at least in Asia.

Commodities were mixed to negative on the week on net, with agricultural contracts gaining sharply (corn and wheat, more than soybeans, due to continued severe weather conditions in the Midwest), as did softs, which offset the sharp decline in the energy sector. The price of crude oil fell by a dramatic -7% on the week to just under $59/barrel. The drop in price has been somewhat surprising, in light of increased tensions with Iran in the Middle East. This normal catalyst for upward movements in prices was outweighed by higher U.S. inventories, coupled with fears of a widespread economic slowing resulting from a longer-than-expected tariff war and broader ramifications globally.

 

 

Period ending 5/24/2019 1 Week (%) YTD (%)
DJIA -0.63 10.79
S&P 500 -1.14 13.67
Russell 2000 -1.39 12.85
MSCI-EAFE -0.51 9.69
MSCI-EM -0.98 2.16
BBgBarc U.S. Aggregate 0.27 3.84

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2018 2.45 2.48 2.51 2.69 3.02
5/17/2019 2.39 2.20 2.17 2.39 2.82
5/24/2019 2.35 2.16 2.12 2.32 2.75

 

 

 

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. 

 

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