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Weekly Update

Market Summary

U.S. stocks staged a fairly broad-based rally this past week to recover early losses from Tuesday that were tied to political uncertainties in Italy and the escalating trade tensions between the U.S. and major economic allies, in addition to the current dispute with China. The late-week rally was driven by a stronger than expected U.S. jobs report and a reprieve to the political crisis in Italy, although rising prospects for a global trade war limited gains. The S&P 500 ended the week 0.5% higher, the Dow slipped 0.5%, and the Nasdaq jumped 1.6% and was just over one percent away from a record high. The 10-year Treasury edged down slightly to 2.90%, while WTI crude oil futures slid back under $66.

The positive news from last week that largely drove U.S. stocks higher was the fact that the U.S. economy added another 223,000 jobs in May, topping consensus expectations, and the unemployment rate dropped to 3.8%, the lowest level since December 2000. The nonfarm payrolls report cemented expectations that the Fed will hike interest rates for the second time this year at their meeting this month. The chances for at least four rate hikes this year currently sits at around 39%, according to CME Group, which is down from 44% a month ago, but the strong economic data may push up this probability. Concerns that rising rates will weaken future growth have sent stocks falling several times this year, but investors didn’t seem to find Friday’s data concerning.

The White House decided to proceed with its proposal to impose 25% tariffs on $50B worth of goods from China, and place limits on Chinese investments in U.S. high-tech industries, thus heating up negotiations between the two nations. In addition, the Trump administration announced the imposition of steel and aluminum tariffs on the European Union, Canada, and Mexico. These economic allies, who were initially discussed as exemptions to the steel and aluminum tariffs, have pledged to retaliate with tariffs on a range of U.S. goods from motorcycles to blue jeans.

Although the tariffs on steel and aluminum account for less than 2% of total U.S. imports and just 0.2% of total economic output according to the Wall Street Journal, the broadening range of goods being targeted for tariffs in response could feed into further inflation and stoke the pressure under rising rates. Investors will be paying close attention to the potential additional wave of tariffs on auto imports currently being considered by the Trump Administration.

Economic Highlights

  • Manufacturing: The US ISM Manufacturing Purchasing Managers Index (PMI) rebounded upward to 58.7 in May from the 9-month low reading of 57.3 in April. The reading exceeded expectations and bolstered Friday’s rally in addition to the employment figures.
  • Inflation: April’s core U.S. Personal Consumption Expenditures (PCE) held steady at 1.8% year-over-year (yoy), maintaining a level near the Fed 2% target. Additionally, personal income rose 0.3%, month-over-month, in line with consensus expectations.

US Economy - The Week Ahead

Tuesday, 6/5/2018

ISM Non-Manufacturing PMI – Consensus Estimate: 57.6 (2.1% MoM), Prior Month: 56.4 (-0.2% MoM)
Job Openings & Labor Turnover Survey – Consensus Estimate: 6.4 million (-2.3% MoM), Prior: 6.55 million (7.8% MoM)

Wednesday, 6/6/2018

Trade Balance – Consensus Estimate: -$49 billion (0% MoM), Prior Month: -$49 billion (15.1% MoM)

Thursday, 6/7/2018

Initial Jobless Claims – Consensus Estimate: 225,000 (0% WoW), Prior Week: 225,000 (-3.8% WoW)

Friday, 6/8/2018

Wholesale Inventories MoM growth – Consensus Estimate: 0.0%, Prior Month: 0.2 %

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