Stocks pause after rally. Asian and European shares were modestly higher overnight and S&P 500 Index futures sit around flat pre-market as market participants evaluate the potential for more concrete developments on trade. An announcement that the U.S. may expand tariffs on European goods reminded markets that the Trump administration will continue to use tariff threats, and implementation if needed, as a favorite policy tool, potentially extracting concessions but also creating a more volatile policy environment for U.S. businesses along the way.
Manufacturing sentiment, construction spending confirm slower growth. The Institute for Supply Management’s manufacturing Purchasing Managers’ Index (PMI) slowed to 51.7 in June (above 50 indicates expansion), ahead of expectations but the slowest rate of growth since 2016. The new orders sub-index, an important leading component, was flat at 50.0, missing expectations. Meanwhile, a report on May construction spending showed the industry contracted 0.8% and remains in contraction year over year. The reports were in line with the general picture of slower but still positive economic growth and did not meaningfully alter second quarter growth expectations. We continue to expect that the recent U.S.-China trade truce and a more supportive Federal Reserve, along with the ongoing impact of fiscal stimulus, may help stabilize growth in the second half of the year.
Investment-grade corporates post strong second quarter performance. Investment-grade corporate bonds outpaced both Treasuries and high yield in the second quarter, according to Bloomberg Barclays indexes, finding the sweet spot between benefiting from lower interest rates and modest credit risk. Low risk of recession and a strong coupon for the investment-grade space may continue to support the sector looking forward, although risks are marginally increasing with rates already low and an increasing proportion of the sector sitting toward the bottom of the range of what’s considered investment grade.
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