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Leigh Baldwin & Co.

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The Week In Review

6/1/18

 

The month of May might have ended with a whimper, but the month of June started with a bang.  Driven by an easing of the political tension in Europe and another employment report out of the U.S. that produced strong job growth, modest wage growth, and the lowest unemployment rate since April 2000, the major indices put together a winning session that was punctuated by leadership from economically-sensitive sectors.

The gains for the major indices ranged from 0.9% for the Russell 2000 to 1.5% for the Nasdaq Composite.  Sellers were an outnumbered bunch on Friday, evidenced by an advance-decline line at the NYSE and Nasdaq that favored advancing issues by a more than 2-to-1 margin.

Leading the advance, which had a risk-on demeanor before the opening bell, was the information technology sector (+1.9%).  It kept good company, however.

Following in its footsteps were the materials (+1.5%), industrials (+1.2%), and financial (+1.1%) sectors.  The countercyclical health care sector (+1.2%) offered an added measure of support that made it challenging to knock the indices back to any considerable degree during Friday's trading.

The bulk of today's gains were logged within the first hour of trading.  They were solidified as the day went on by better than expected construction spending and ISM manufacturing data, as well as the news from the White House that the June 12 summit with North Korea in Singapore is back on in what it is apt to be a multi-step negotiating process for denuclearization of the Korean Peninsula.

Interestingly, the protectionist trade concerns that drove the market lower on Thursday were placed on the back burner on Friday. 

Traders instead embraced the report out of Europe that Italy's president gave a mandate to the anti-establishment 5-Star Movement and right-wing League Party to form a government, thereby avoiding the need for a snap election that some thought could end up being a referendum on Italy's membership in the European Union.

That news triggered a risk-on tone in European markets that carried over to the U.S.  The reassuring employment report simply accentuated the positive bias that persisted throughout the trading day.

Reflecting the upbeat tone, 27 out of 30 Dow components registered a gain on Friday while only two of the 11 S&P sectors -- utilities (-1.5%) and consumer staples (-0.03%) -- ended with a loss.

The energy sector (+0.5%) for its part kept its head above water even though oil prices ($65.83, -$1.14, -1.7%) fell sharply in a technically-driven sell-off.

Treasuries were also weak on Friday as some of the safe-haven premium tied to European politics was unwound along with the notion that the Federal Reserve won't raise the fed funds rate at least three times this year.  The 2-yr note yield increased seven basis points to 2.48% while the 10-yr note yield jumped eight basis points to 2.90%.

Reviewing Friday's economic data:

  • May nonfarm payrolls increased by 223,000 (Briefing.com consensus 190,000).  May private sector payrolls increased by 218,000 (Briefing.com consensus 177,000).
  • May unemployment rate was 3.8% (Briefing.com consensus 3.9%) versus 3.9% in April
  • May average hourly earnings were up 0.3% (Briefing.com consensus +0.3%), after increasing 0.1% in April. Over the last 12 months, average hourly earnings have risen 2.7%, versus 2.6% for the 12 months ending in April
    • The key takeaway from the May employment report is that it still had a Goldilocks hue to it, as it was accented with strong job growth and only moderate wage inflation.
  • The ISM Manufacturing Index increased to 58.7 (Briefing.com consensus 58.0) from 57.3 in April.  The dividing line between expansion and contraction is 50.0; May marked the 21st consecutive month the index has been above 50.0.
    • The key takeaway from the report is the summary that respondents are experiencing price pressures and that those price pressures are causing price-increase discussions as they prepare for the second half of the year.
  • Total construction spending increased 1.8% in April (Briefing.com consensus +1.0%) following an unrevised 1.7%  decline in March.
    • The key takeaway from the report is that it showed a welcome pickup in construction spending growth, which will be a source of support for Q2 GDP forecasts.
  • Nasdaq Composite +9.4% YTD
  • Russell 2000 +7.4% YTD
  • S&P 500 +2.3% YTD
  • Dow Jones Industrial Average -0.3% YTD

Week In Review:

The stock market finished the week on a mostly higher note as investors digested an easing of the political crisis in Italy, fresh tariff-related developments, and the Employment Situation report for May. The S&P 500 (+0.5%), the Nasdaq Composite (+1.6%), and the Russell 2000 (+1.3%) advanced, while the Dow Jones Industrial Average (-0.5%) finished a step lower.

U.S. markets opened the week on Tuesday following a three-day Memorial Day weekend. Sellers dominated that Tuesday session after Italian President Sergio Mattarella blocked the formation of a euro-skeptic government, vetoing the economic minister nominee of an anti-establishment coalition that was aiming to come to power. Italian bond yields surged in reaction as some feared the veto would prompt a snap election that could turn into a de facto referendum on Italy's membership in the European Union. The Italian political crisis calmed down on Thursday evening, when President Mattarella approved the formation of a ruling coalition between Italy's anti-establishment Five Star Movement and right-wing League party, effectively silencing the prospect of a snap election later this year.

Elsewhere in Europe, Spain endured some political drama of its own this week as Prime Minister Mariano Rajoy was ousted on Friday in a no-confidence vote following a corruption scandal involving 29 individuals with ties to his People's Party. Pedro Sanchez, the leader of the Socialist Party, will succeed Mr. Rajoy as prime minister. Separately, German financial giant Deutsche Bank hit a 16-month low on Thursday after The Wall Street Journal reported that it's on the Federal Reserve's list of troubled banks.

Back in the U.S., the stock market rebounded from its Tuesday slide on Wednesday with energy shares leading the charge following reports that OPEC and Russia will keep production cuts in place until at least the end of the year. West Texas Intermediate crude futures rallied on Wednesday in reaction, but still finished the week lower by 3.0%.

Stocks stumbled for a second time on Thursday when the Trump administration announced that it will let steel and aluminum tariff exemptions expire for the EU, Canada, and Mexico. The White House's decision, which elicited retaliatory responses from the EU, Canada, and Mexico as expected, will result in duties of 25% on steel imports and duties of 10% on imports of aluminum, effective June 1.

Wall Street bounced back on Friday, bolstered by an easing of the political tension in Europe, news that the June 12 summit with North Korea is back on, and the release of the Employment Situation report for May, which featured a better-than-expected increase in nonfarm payrolls (+223K actual vs +190K Briefing.com consensus) and a lower-than-expected unemployment rate (3.8% actual vs 3.9% Briefing.com consensus). The average hourly earnings figure came in as expected, showing a month-over-month increase of 0.3%.

The key takeaway from the employment report is that it still had a Goldilocks hue to it, having been accented with strong job growth and only moderate wage inflation.  Furthermore, the strong job growth and low unemployment rate created some good feelings about the potential for a pickup in consumer spending that should aid the second quarter growth outlook.

Six of eleven S&P sectors declined this week, with financials (-1.3%), telecom services (-0.9%), and industrials (-0.7%) being the weakest performers. Conversely, energy (+2.5%), technology (+2.0%), and real estate (+1.7%) were the top-performing groups.

Retailers dominated the earnings front once again, with Costco (COST), Dollar General (DG), Dollar Tree (DLTR), lululemon (LULU), Ulta Beauty (ULTA), Dick's Sporting Goods (DKS), and others reporting their quarterly results, which came in mixed. The SPDR S&P Retail ETF (XRT) settled roughly flat for the week.

U.S. Treasuries were volatile this week, eventually finishing with modest gains. The benchmark 10-yr yield, which moves inversely to the price of the 10-yr Treasury note, finished the week lower by three basis points at 2.90%. Meanwhile, the U.S. Dollar Index eked out a fractional gain, settling the week at 94.22.

Headlines provided by Briefing.com