China stimulus driving stocks higher globally. Stocks are poised to add to recent gains, lifted by China’s support for its currency and infrastructure spending. The market’s positive reaction comes despite President Trump’s threat to raise tariffs again if President Xi does not meet with him at the G-20 Summit later this month. Market participants appear to like the support for the Chinese economy more than they are worried about China digging in for a longer fight. We expect U.S.-China relations to get worse before they get better but continue to expect progress over the next several months.
Long-term yields rally. A resurgence in risk appetite has halted the recent drop in U.S. longer-term yields. The 10-year Treasury yield rebounded on Monday, a day after closing at a fresh 20-month low of 2.08%. The recent drop in yields has been swift, and we’ve maintained that the 10-year yield is now significantly lower than what economic fundamentals justify. Still, the uncertainty around trade, geopolitics and global growth could limit yields’ upside in the coming months.
Producer price growth slows. Wholesale price growth fell to a 16-month low in May. The core Producer Price Index, which excludes food and energy prices, rose 2.3% year over year, its slowest pace of growth since January 2018. Wage and producer pricing pressures have abated recently and remain at manageable levels.
Small business optimism climbs. The National Federation of Independent Business’ Small Business Optimism gauge climbed to 105 in May, a seven-month high. Respondents that made capital outlays rose to a 15-month high, while businesses with plans to increase capital spending rose to a seven-month high. Recent trade escalation hasn’t curbed consumer and business sentiment yet, a sign that demand could stay solid enough to weather higher tariffs.
Course correction. Bonds have increasingly signaled that policy may be too tight for an economy tied up in a drawn-out trade dispute. There have been signs that growth could slow over the coming quarters and eventually, the Federal Reserve (Fed) may have to intervene by lowering interest rates. On today’s LPL Research blog, we examine the history of Fed “course corrections,” including one example with several parallels to today’s environment.
- NFIB Small Business Optimism Index (May); LP: 103.5
- PPI Report (May); Cons: 0.1%, LP: 0.2%
- Japan PPI Report (May)
- China CPI Report (May)
- China PPI Report (May)
- CPI Report (May); Cons: 0.1%, LP: 0.3%
- Import Price Index (May); Cons: -0.3%, LP: 0.2%
- Export Price Index (May); LP: 0.2%
- Initial Jobless Claims (Jun. 8); LP: 215K
- Germany CPI Report (May)
- Eurozone Industrial Production (Apr)
- China Industrial Production (May)
- China Surveyed Jobless Rate (May)
- Retail Sales (May); Cons: 0.6%, LP: -0.2%
- Industrial Production (May); Cons: 0.2%, LP: -0.5%
- University of Michigan Sentiment Index (Preliminary, Jun); LP: 100
- Japan Industrial Production (Apr)
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