U.S. equities consolidate just below all-time highs. Major U.S. indexes are modestly lower over the past week, with the S&P 500 Index down 0.97% since June 20’s record closing high. However, under the surface we are seeing the type of action necessary for another leg higher. Defensive sectors, which have strongly outperformed over the past year and include real estate and utilities, are down sharply over the past week, while more cyclical sectors such as materials and financials have outperformed. Combined with the early-morning boost bank stocks are seeing following clearance from the Federal Reserve (Fed) to increase payouts, we may be seeing the beginning of a rotation into the more cyclically driven rally we called for in our recently released Midyear Outlook 2019.
Core PCE shows signs of life. The Fed’s core inflation gauge, core personal consumption expenditures (PCE), excluding food and energy, rose 0.2% month over month and 1.6% year over year. Personal income climbed 0.5% for a second consecutive month, beating forecasts with domestic pricing and wage growth remaining manageable. The Fed’s preferred inflation gauge displayed signs of picking up in May toward the central bank’s inflation target of 2%, though a July rate cut still looks like a foregone conclusion at this point. Even with the generally positive economic backdrop, the G20 meeting still lingers as a very influential catalyst in the Fed’s pending rate decision.
Expectations are high for G20 meeting this weekend. President Trump announced that he expects a “productive” meeting with President Xi on Saturday morning in Japan, while also noting he did not promise Xi a six-month reprieve from tariffs. The consensus best-case scenario likely involves a truce in which the U.S. will delay additional tariffs and re-initiate previous negotiations even though it remains unclear if there will be a hard deadline for the talks. However, there is a continued uncertainty regarding the weekend, given that neither side has displayed flexibility on high-profile issues and there doesn’t appear to be immediate pressure for a deal from the markets at the moment. We continue to believe that an agreement between the U.S. and China is probable, but more economic pain may need to be felt by both sides before they can come to terms.
- Personal Income (May)
- Core PCE (May)
- University of Michigan Sentiment Index (June)
- UK GDP Report (Q1)
- Eurozone CPI Report (Preliminary, June)
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