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Market Recap week ending 7/5/2019

-Darren Leavitt, CFA

I hope everyone had a great and memorable 4th of July holiday.  Despite the holiday-shortened week, markets were quite busy.   Markets surged on Monday in reaction to the outcome of the US/China trade talks at the G20 summit.  The two sides decided to continue discussions and hold off on any new tariffs.  However, the week’s initial pop was tempered with weak PMI data from Japan, China, and the Eurozone.  The S&P 500 gained 1.65% on the week while the Dow, NASDAQ and Russell 2000 added 1.21%, 1.94%, and 0.58%, respectively.  The yield curve flattened out a bit last week as the 2-year yield gained 13 basis points to close at 1.87% and the 10-year yield gained 5 basis points to close at 2.05%.  Gold was off $14 to close at $1400. Oil closed at $57.40 a barrel down just under a dollar from the prior weeks close.

As expected, the US and China agreed to continue negotiations and halt any further tariffs.  The news encouraged markets higher, especially in the more cyclical sectors.  Semiconductors soared on news that the US would rescind some of the restrictions placed on doing business with Huawei.  This single concession seemed to validate hopes for further progress in the negotiations.  However, on Friday, headlines suggested that China will insist that all current tariffs be removed if an accord is to be reached.

Weak international economic data persisted last week.  Notably, PMI figures in Japan, the Eurozone, and China remained in contraction.  Japan’s PMI came in at 49.3 down from the prior month’s reading of 49.5.  In Europe, manufacturing came in at 47.6 down from May’s reading of 47.8.  Moreover, in China, the PMI figure was unchanged at 49.4.  Exports out of South Korea also looked terrible as did factory data out of Germany.  In the US, the ISM manufacturing reading also declined on a month over month basis, but the reading continued to signal expansion.  The figure came in at 51.7 down from the prior months reading of 52.1.  The US Employment Situation Report rattled markets on Friday.  The headline Non-Farm Payrolls number came in much better than expected- 224k versus the consensus estimate of 160K.  The Unemployment number came in slightly worse than expected at 3.7% versus the consensus estimate of 3.6%.  Average Hourly earnings came in up 0.2% versus the estimate of 0.3% and is up 3.1% over the last 12 months.  Fed Fund futures erased any chance of a 50 basis point cut in July after the report was released.  Currently, Fed Fund futures indicate a 100% probability of a 25 basis point cut in July.

Of note, Christine Lagard, the current IMF president, was nominated to become the next European Central Bank President.  If confirmed she will succeed current President Mario Draghi.  Lagard is not an economist rather a politician.  While at the IMF, she has supported the use of quantitative easing and is likely to support the current dovish policy tones out of the ECB.

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