Market in a Minute: June 3–7, 2019
by Rich and Sheila Jamison
Equities posted their best week of 2019 on expectations the Fed will cut rates to mitigate slowing growth. In all, three of the world’s most influential central banks said that they are preparing to act if the global economy continues to weaken. Even a very disappointing May jobs number led to an up day, investors apparently taking it as further impetus for rate cuts.
All 11 S&P 500 sectors finished higher. Materials led (up by 9.1%) while Communications Services brought up the rear (‘only’ up by 0.9%).
With the market pricing in multiple Fed rate cuts, the yield on the US 10-year Treasury note fell to 2.08%, its lowest level in 17 months.
WTI crude oil rose $0.44/barrel, to $53.92 – still off more than 20% from its April peak.
Volatility declined to 16.3 from 18.7 a week ago, according to the Chicago Board Options Exchange Volatility Index, VIX.
Federal Reserve Chair Jerome Powell dropped the word "patient" from his description of the central bank's policy stance when speaking at a conference in Chicago last week. He said instead, the Fed is monitoring the implications of trade developments on our economy, and will act as appropriate to sustain the expansion. Markets are continuing to price in rate cuts. The fed funds futures market sees an 85.6% chance for a July rate cut and multiple rate cuts possible by the end of the year.
Faltering Employment Supports Cuts
May’s nonfarm payrolls (i.e., in the Labor Department's Employment Situation Report) grew a less-than-expected 75,000. Large downward revisions to the prior two months' data shaved an additional 75,000 jobs from the employment rolls. The unemployment rate held steady at 3.6%, still near a 50-year low. Wages increased at a 3.1% annual rate, showing few signs of accelerating. The conclusion drawn is companies have turned cautious on hiring amid slowing global growth and increasing trade tensions. Immediately following the report’s release, futures turned negative. They quickly rebounded as Deceleration in jobs growth and soft wage-based inflation in for May bolstered these rate-cut expectations.
President Trump announced early Friday that 1) progress made in talks with Mexico was insufficient to keep his tariffs from going into effect Monday, and later in the day, 2) a deal had been reached with Mexico that indefinitely postpones his proposed tariffs on Mexican goods. Details are sketchy. What we think we know suggests that the suddenly acceptable deal is built on two key concessions Mexico made 1-2 months ago, but Mexico has still not accepted the third key piece. Speculation that a Senate ‘revolt’ objecting to the use of tariffs – endorsed by many Republican Senators – and claiming to have the votes to override a presidential veto may have been a critical factor in the president’s intra-day reversal.
Manufacturing continues to slow, but is still growing. The Institute for Supply Management's PMI for May was 52.1, lower than April's 52.8 but still above 50 – the demarcation line between expansion and contraction.
Three of the world's most influential central banks signaled this week that they are ready to take action if the global economy continues to weaken. The US led the as noted under the domestic details. Later in the week, European Central Bank President Mario Draghi acknowledged that some members of the Governing Council raised the possibility of a rate cut at the council's Thursday meeting while also postponing any hike until the middle of 2020. The ECB additionally laid out the parameters for another round of cheap loans in order to ensure ample liquidity in Europe's banking system, though the new loans will be slightly pricier than the ones they are replacing. On Friday, the People's Bank of China indicated that it has ample room to ease monetary policy further if the trade war deepens. Meanwhile, two central banks lowered rates this week: The Reserve Bank of Australia cut its overnight lending rate to a record low of 1.25% while the Reserve Bank of Indian trimmed its repo rate for the third time this year, to 5.75%.
The global manufacturing sector continues to cool, as illustrated by a contraction. The JPMorgan global PMI for May fell to 49.8, the lowest level since October 2012. More than half of the world's manufacturing PMIs contracted in May.
The World Bank lowered its 2019 global growth forecast to 2.6% from its January projection of 2.9%.
The International Monetary Fund lowered its forecast for economic growth in China to 6.2% this year and 6% next year, down 0.1% from its January forecasts.
China released a white paper on trade critical of the US, blaming us for backing away from a trade deal in early May. At the same time, the country reiterated its willingness to renew talks. As we write, the first direct contact between the two sides is occurring at a meeting in Japan to prepare for the full G20 summit, which takes place later in June. Treasury Secretary Steven Mnuchin is set to meet People's Bank of China Governor Yi Gang.
Chinese state media reported that China and Russia agreed to develop a comprehensive strategic partnership in hopes of taking bilateral ties to a higher level.
The EU & Italy
The European Commission called on Italy to cut its fiscal deficit by €4 billion. It said it will begin an excessive deficit procedure, which could result in fines and the withholding of some funds from the EU if Italy does not comply.
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