Yesterday’s Market Activity
- Quiet day sent S&P 500 (-0.1%) and Dow (-0.1%) lower. S&P 500 still up 8.8% year to date.
- Energy top sector but managed only a slight gain as sector performance was tightly bunched. Industrials, materials, and utilities were biggest laggards. Growth concerns may have led to weakness in small caps, transports.
- Emerging markets (EM) equities outperformed (MSCI EM index +0.3%), Europe lagged (MSCI Europe -0.3%).
- Treasuries weaker across the curve. 10-year Treasury yield up 0.02% to 2.18% (2-year +0.01% to 1.30%).
- WTI crude oil fell 0.5% but energy sector outperformed anyway. COMEX gold up 0.2% even though dollar was up slightly.
- ISM Services roughly in line. Q1 productivity revised upward (details below).
- Infrastructure push by Trump administration not likely to go very far. Could eventually be pared back and attached to a tax change such as repatriation.
Overnight & This Morning
- Global equities lower in Tuesday sessions. Markets may be hesitating to take new positions ahead of key events later this week.
- S&P 500 down 0.2% in early trading.
- Policy, political concerns getting headlines but no new meaningful developments. Hot topics include healthcare, tax reform, 2018 budget, debt ceiling (ETA September 2017), infrastructure, Comey testimony, and the U.K. elections.
- European markets down slightly. Participants may be in wait and see mode ahead of European Central Bank (ECB) meeting and U.K. elections on Thursday (June 8).
- Asian markets mixed overnight. Japan lagged (Nikkei -1.0%), Hong Kong (Hang Seng +0.5%) and China (Shanghai Composite +0.3%) rose.
- Australian central bank (RBA) left policy unchanged as expected (1.50% target rate).
- Gold getting safe haven bid with 0.9% gain this morning to near $1300/oz. on modest U.S. dollar weakness; yen also seeing safe haven demand as stocks fall.
- Oil down 0.3% near $47/bbl. on potential lack of coordination among global producers following decision by Arab states to cut ties with Qatar on top of U.S. production ramp-up.
- Rates plumbing post-election lows. 10-year yield down 0.04% to 2.14%.
- JOLTS report due out today – The Job Openings and Labor Turnover Survey (10:00am ET) highlights Tuesday’s domestic economic calendar. Private sector (API) crude inventories due at 4:30pm ET.
- Chorus of bears arguing stocks have run too far is growing. We acknowledge stocks are due for a pullback (the last 5% pullback in the S&P 500 was June 2016). But our assessment of the macro backdrop along with evidence of cautious sentiment and favorable technical conditions suggests stocks are still well supported despite elevated valuations. Improving earnings, healthy skepticism among market participants, and strong breadth are among supportive factors.
- The yield curve is flattest it’s been all year, as the market may be pricing in lower inflation expectations, increased geopolitical tensions, and the Federal Reserve (Fed) raising short term rates.
- Positive job signal from ISM Services report. Helps offset May payrolls miss. Job market is doing just fine, though the skills gap, which will be evident in today’s JOLTS report, remains an issue.
- Treasury prices were higher on the week. The Treasury market rallied on Friday after weaker than expected private payrolls data showed that the economy added 138,000 new jobs in May, well below the consensus expectations of 185,000. The bond market reaction was positive. The 10-year yield closed the week at 2.15%, its lowest yield for the year, after starting the week at a 2.25%. Year-to-date, the 10-year is lower in yield by 0.30%. The 30-year bond finished the week at a 2.80% yield, down in yield (up in price) from the beginning of the week’s 2.92%. The 2-year Treasury yield only fell by 0.02% on the week, underperforming the longer maturities, as this spot is more sensitive to Fed rate hikes.
- The yield curve flattened to its lowest level year-to-date. The Treasury yield curve remains flat as the 2’s to 10’s slope (a measure of the steepness of the yield curve) ended the week at 0.87%, flatter by 0.08% from the prior week. This is the flattest the curve has been all year and 0.41% tighter than the wide spread of 1.28% in February as investors flocked to Treasuries to minimize risk. The 2’s to 30’s yield slope ended the week at 1.52%, flatter by 0.10% from the prior week.
- Inflation expectations are at year-to-date lows. The 10-year breakeven inflation rate finished the week lower from a 1.81% to a 1.78% according to Federal Reserve Economic Data. This is the lowest spread year-to-date as investors are driving the yields on nominal Treasury bonds lower, thus driving the breakeven lower. The 1.78% level is below the Fed’s 2% inflation target.
- Municipal bonds performed well in May moving more than Treasuries. The 10-year part of the municipal yield curve was lower in yield by 0.20% in May while the 10-year Treasury yield was lower by 0.10% for the same time period. The 30-year municipal moved lower by 0.24% while the 30-year Treasury was lower by 0.15% in May. Intermediate municipals returned 1.49% in May, as measured by the Bloomberg Barclays Municipal Bond Index. For May, intermediate municipals returned 1.49% while the Bloomberg Barclays Aggregate Index, often considered the bond market proxy, returned 0.77%.
- Services sector growth remains solid. The Institute for Supply Management’s Non-manufacturing Purchasing Managers’ Index (PMI) for May declined slightly to 56.9 from 57.5, signaling continued steady growth in services industries (above 50 indicates expansion). Non-manufacturing sectors make up about 80% of the private economy. Acceleration in employment was especially strong with real estate and construction the fastest growing industries.
- Eurozone: Markit Eurozone Services PMI (May)
- Eurozone: GDP (Q1)
- Japan: GDP (Q1)
- Japan: Current Account Balance (Apr)
- Japan: Trade Balance (Apr)
- Germany: Industrial Production (Apr)
- UK: General Election, 2017
- ECB: Draghi
- Japan: Machine Tool Orders (May)
- China: CPI & PPI (May)
- Wholesale Sales & Inventories (Apr)
- France: Industrial Production (Apr)
- UK: Industrial Production (Apr)
- UK: Trade Balance (Apr)
- China: Money Supply and New Yuan Loans (May)
Past performance is no guarantee of future results.
The economic forecasts set forth in the presentation may not develop as predicted.
The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Stock investing involves risk including loss of principal.
Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.
Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.
Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments.
Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate.
Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards.
High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.
Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.
Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.
Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.
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