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Market Summary

US equity performance was a mixed bag this past week with the information technology sector surging 3.2%, while all other sectors ended about even or down for the week, with the worst performer being the telecommunications sector that lost 4.6%. The tech-laden Nasdaq index led U.S. stock indices with a 1.7% return for the week, versus small declines of 0.2% and 0.3% for the Dow and S&P, respectively. Stocks rallied late in the week after the unemployment rate was reported to have dropped to 3.9%, the lowest point since 2000. The unemployment report highlights the tightness of the labor market, and the slowing job and wage growth data potentially indicates that economic growth is losing steam as the U.S. reaches full employment.

In addition to muted job and wage growth, several other economic indicators, including manufacturing and consumption, have pointed to a potential slowdown in growth across the U.S. economy. However, many investors have noted that they remain positive on stocks relative to other asset classes based on strong first quarter earnings reports as well as signs that the Fed will stick to its measured and gradual course of interest rate hikes. Amid expectations of upcoming rate hikes, the dollar has broken into positive territory for the year due to the increasingly attractive interest rate differential between the U.S. and other developed economies.

Regarding the path of interest rate hikes, the Federal Open Market Committee stated after last week’s meeting that "inflation on a 12-month basis is expected to run near the Fed’s symmetric 2% objective over the medium term." This indicates that they may let inflation run on the high side of the 2% inflation target for a while rather than becoming more aggressive in hiking rates. The Fed Funds rate was left unchanged at 1.5-1.75%, and bond yields were mostly unchanged following the news as it generally met expectations.

In international trade news, the Trump administration has delayed its decision about whether to impose steel and aluminum tariffs on the European Union, Canada and Mexico until June 1, giving allies a brief reprieve as the countries carry out further negotiations. In trade talks with China, reports surfaced that the U.S. has requested for China to reduce the bilateral trade deficit by at least $200B by the end of 2020, as well as halting all government support for advanced technologies.

Economic Highlights

  • Manufacturing: The US ISM Manufacturing Purchasing Managers Index (PMI) dropped to a 9-month low reading of 57.3 in April, which was below the prior month reading of 59.3 and expectations of 58.3. Deterioration in production, new orders, and employment led the decline. Key components remain in expansion territory (i.e. above 50.0), but have trended downward in recent months, signaling potential for slowing economic growth rates.
  • Employment: US unemployment fell to 3.9% in April, which is the first time crossing below the 4.0% mark since the Clinton administration. Despite the tightening labor market, wage growth remains muted with average hourly earnings rising just 0.1% in April after growing 0.2% in March.
  • Oil: Crude oil prices (WTI) broke $70 a barrel for the first time since November 2014 on concerns over the collapse of Venezuela's oil industry and possible new sanctions against Iran. President Trump will decide this week whether to pull out of the 2015 Iran nuclear agreement. Rising oil prices can cut into corporate profit margins and consumer discretionary income but are also a boon to the earnings of the U.S. energy sector that has suffered since late 2014.

US Economy - The Week Ahead

Tuesday, 5/8/2018

NFIB Small Business Optimism Index – Consensus Estimate: 104.2 (-0.5% MoM), Prior: 104.7 (-2.7% MoM)
Job Openings & Labor Turnover Survey – Consensus Estimate: 6.101 million (0.8% MoM), Prior: 6.052 million (-2.8% MoM)

Wednesday, 5/9/2018

US Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 2.8%, Prior Month: 3.0%

Thursday, 5/10/2018

Initial Jobless Claims – Consensus Estimate: 218,000 (3.3% MoM), Prior Week: 211,000 (1.0% MoM)
US Consumer Price Index (CPI) Year-Over-Year – Consensus Estimate: 2.5%, Prior Month: 2.4%

Friday, 5/11/2018

University of Michigan Consumer Sentiment Survey – Consensus Estimate: 98.4 (-0.4% MoM), Prior: 98.8 (-2.6% MoM)

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