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Market Summary

Following a week of strong U.S. economic data highlighted by favorable employment figures, U.S. equities posted solid returns and rallied from a two week slide driven by escalating trade tensions. For the week, the Dow rose 0.8%, the Nasdaq racked up a 2.4% advance, and the S&P 500 gained 1.5%, with all of the 11 major sectors generating positive returns. The 10-year U.S. Treasury closed the week down 2 basis points at 2.83% and WTI crude oil edged down 0.5% to $73.80.

Nonfarm payrolls increased by 213,000 jobs last month, according to the U.S. Department of Labor. This topped expectations of 195,000, while the unemployment rate rose from an 18 year low of 3.8% back up to 4.0% and average hourly earnings rose just 0.2%.  The low wage growth calmed market fears of a strong build up in inflation and boosted optimism that the Federal Reserve would stay on a continued course of gradual interest rate hikes.

The positive news from the U.S. employment numbers mildly offset heightened trade concerns between the U.S. and China. The two countries slapped matching tariffs on each other, to the tune of $34 billion worth of imports, which went into effect on Friday.  Investors were pleased that the value of goods targeted by the tariffs is less than previously mentioned. However, the U.S. has warned that the administration might ultimately target over $500 billion of Chinese goods, an amount that matches the total imports from China in 2017.

Investors have also grown increasingly cautious of the flattening U.S. Treasury yield curve, which reached its flattest point since 2007 this past week with a spread between the two and ten-year yields of only 0.29%. An inverted yield curve has historically been an accurate indicator of coming economic downturns, as it implies investor belief that economic growth will contract and force rate decreases. However, the stock market has also historically posted strong returns in the years leading up to yield curve inversion and there is typically a notable lag between inversion and economic downturn of up to two years.

Economic Highlights

  • Employment: A slight upward rebound in the unemployment rate from 3.8% to 4.0% in May was taken with positive sentiment as it indicated more people have re-entered the labor force and began looking for work due to strong employment prospects. The move is also supportive of a less-aggressive, gradual interest rate hike path from the Federal Reserve, which would decrease the risk of a monetary policy error that inverts the yield curve.
  • Foreign Exchange: The U.S. Dollar Index declined 0.5% this past week, weighed down by trade tensions. The decline cooled off a notable rise in the U.S. Dollar, which grew 5.2% overall against its trading partners in the second quarter. However, bullish sentiment continues to drive up the USD futures market as the nation has generated strong economic growth figures relative to other foreign nations.

US Economy - The Week Ahead

Tuesday, 7/10/2018

Job Openings & Labor Turnover Survey – Consensus Estimate: 6,680K (-0.3% MoM), Prior Month: 6,698K (2.3% MoM)

Wednesday, 7/11/2018

U.S. Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 3.2%, Prior Month: 3.1%

Thursday, 7/12/2018

Initial Jobless Claims – Consensus Estimate: 225,000 (-2.6% WoW), Prior Week: 231,000 (1.8% WoW)
U.S. Consumer Price Index (CPI) Year-Over-Year – Consensus Estimate: 2.9%, Prior Month: 2.8%

Friday, 7/13/2018

University of Michigan Consumer Sentiment Survey (Preliminary) – Consensus Estimate: 98.2 (0.0% MoM), Prior: 98.2 (0.2% MoM)

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