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Weekly Update

Market Summary

U.S. stocks closed mostly lower for the week as investors continued to grapple with the uncertainty over rising rates and geopolitical concerns. The Dow and S&P each edged down 0.5%, while the Nasdaq declined 0.7% for the week.  The one bright spot was the U.S. small-cap stock index, the Russell 2000, which rose 1.3% for the week, a third record close in a row. The Russell 2000 is now up 6.4% year-to-date, the highest of the domestic stock indices.

Last Tuesday’s reading of U.S. retail sales noted a moderate increase, indicating that consumption may be regaining some traction after a weak first quarter. The results helped bolster growth and inflation expectations that pushed up long-term interest rates, which can weigh on stock markets through increasing concern of higher borrowing costs and more attractive bond yields as an alternative to investing in stocks. The 10-year treasury is now hovering around its highest level since 2011 at 3.07%.

In addition to pressure from rising rates, several sources of geopolitical tension weighed on stocks last week. Among the primary sources of tension were doubts about resolution from the upcoming talks between the U.S. and North Korea and the continuing trade negotiations with China. However, trade tensions have eased slightly coming out of the weekend as the U.S. has suspended its potential $150 billion tariffs on Chinese goods in exchange for China increasing its purchases of American goods, thereby reducing the U.S. trade deficit.

Despite geopolitical uncertainty and rising rates, the first quarter earnings season had strong results with almost 80% of companies exceeding earnings expectations, and the economic growth outlook remains broadly positive, albeit with a slight dip in the first quarter.

Economic Highlights

  • Housing: U.S. housing starts slumped 3.7% month-over-month in April as mortgage rates hit a seven year high with the average 30-year fixed-rate mortgage rising to 4.61%, according to Freddie Mac. The 30-year mortgage rate generally moves in sync with the 10-year Treasury Yield.
  • Commodities: Brent crude oil traded above $80 per barrel for the first time in four years as U.S. sanctions on Iran limited supply. Rising oil prices can serve as a headwind to corporate profits as they reduce consumer discretionary income and increase the cost of vital inputs, especially in the industrial sector.
  • Manufacturing: US industrial production exceeded expectations in April rising by 0.7% month-over-month versus the consensus projection of 0.6%. The increase was primarily driven by utilities and mining output.

US Economy - The Week Ahead

Tuesday, 5/22/2018

No Data

Wednesday, 5/23/2018

Federal Open Market Committee (FOMC) Minutes released from 5/2/18 meeting
New Home Sales – Consensus Estimate: 679,000 (-2.0% MoM), Prior Month: 694,000 (4.0% MoM)

Thursday, 5/24/2018

Initial Jobless Claims – Consensus Estimate: 230,000 (-0.9% MoM), Prior Month: 232,000 (-0.4% MoM)
Existing Home Sales – Consensus Estimate: 5.57 Million (-0.2% MoM), Prior Month: 5.6 Million (1.1% MoM)

Friday, 5/25/2018

Durable Goods Orders (MoM) – Consensus Estimate: -1.4%, Prior Month: 2.6%
University of Michigan Consumer Sentiment Survey (Final) – Consensus Estimate: 98.8 (0.0% MoM), Prior Month: 98.8 (-2.6% MoM)

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