Market Update: Friday, June 30, 2017

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Yesterday’s Market Activity

  • Volatility continued as Dow 30, at its worst, was down 250 points before paring losses into the close, finishing down 167 points (-0.8%); S&P 500 -0.8%, Nasdaq -1.8%.
  • Global investors increasingly concerned about potential removal of monetary stimulus, citing comments from leading central bankers.
  • Market swings most evident in the CBOE Volatility Index, which surged ~+50% in early afternoon trading before finishing up +14%.
  • Technology lagged (-1.8%), bringing its monthly loss to -2.6%, though still +17% YTD.
  • Financials continued to climb, buoyed by rising yields, Fed’s decision on Wednesday to allow U.S. banks to increase dividends, share buybacks.
  • 10-year Treasury yield up four basis points to 2.27%, dollar weakened vs major currencies.

Overnight & This Morning

  • Asian stocks (ex China) fell, trimming MSCI’s Asia Pacific Index gains for the quarter. Technology continued to weigh following decreased sentiment in U.S.; rising yen hurt Japanese exporters.
  • Nikkei -0.9%, Japan’s core inflation +0.4% in May, highest since December 2014. Jobless rate +3.1%, industrial production -3.3% month-over-month.
  • European stocks steadied after yesterday’s sharp losses, tech leading gains. Euro Stoxx 600 +0.3%.
  • Most sovereign bonds higher; 10-year bund yield -0.02% to 0.43%.
  • UK Q1 GDP growth unrevised at +0.2%, service sector +0.2% in May, putting GDP on course for Q2 GDP of +0.4%. Savings rate fell to lowest on record, household incomes fell for third consecutive quarter, longest stretch in 40 years.
  • Commodities – WTI crude oil ($45.33/bbl.) +0.9%, headed for seventh straight daily gain. COMEX gold ($1242/oz.) inching lower, headed for weekly decline, copper -0.4%.
  • Release of President Trump’s steel tariffs likely to be delayed to mid-July due to resistance from lawmakers and businesses.
  • U.S. stocks up early. Nasdaq recovering after another tech selloff. Dow +0.5%, S&P +0.3%.
  • Treasury yields steady as dollar firms after three days of losses.
  • Personal income (+0.4%) and spending (+0.1%) basically in line, but core PCE deflator -0.1% for +1.4% YOY increase.

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Key Insights

  • Central banks. It is very likely that the global financial markets have overreacted to various speeches/statements from several leading global central bankers this past week. Though the UK has experienced a jump in inflation, this is the result of the weakened pound sterling stemming from the outcome of the Brexit vote, which has negatively impacted prices for the EU’s largest importer. Other recent data includes gross domestic product (GDP) on track for <0.5% and household incomes at a multi-decade low. The rest of Europe has seen an improvement in economic data, yet uncertainty around Brexit negotiations, elections in Italy and Germany, all warrant caution. In Japan, core inflation is running <0.5% despite an unemployment rate of 3.1%. Weak industrial production (-3.3% last month) also suggests reduced demand, and ultimately, pricing pressures. In the U.S., we remain at a below trend GDP pace and just reported a drop in core Personal Consumption Expenditures (PCE) prices (-0.1%) last month and a still low +1.4% year over year. In summary, global growth is good, not great, and inflation pressures remain mild. Any adjustment in monetary policy is likely to be gradual in the U.S. and even less so globally.

Macro Notes

  • Holiday week brings key data. While we get ready to fire up our grills on Monday for our July 4th barbecues, markets will have the important Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI) to digest that will help assess the health of the domestic manufacturing sector. But that isn’t all for a busy week as minutes from the June 13-14 Federal Reserve policy meeting are due out on Wednesday and then Friday brings the always closely watched payrolls data. Key overseas data includes services PMI surveys in Europe, China’s manufacturing PMI and the Japanese Tankan sentiment survey.

 

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Click Here for our detailed Weekly Economic Calendar

Friday

  • Personal Income (May)
  • Consumer Spending (May)
  • Chicago PMI (May)
  • Core Inflation (May)
  • UK: GDP (Q1)
  • France: CPI (Jun)
  • Germany: Unemployment Change (Jun)
  • Eurozone: CPI (Jun)
  • Canada: GDP (Apr)
  • Japan: Vehicle Production (May)
  • Japan: Housing Starts (May)
  • Japan: Construction Orders (May)

 

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