Week in Review June 16, 2017
U.S. stocks finished mixed again last week, with NASDAQ falling for the second week in a row, the first time that’s happened in two months.
The tech heavy NASDAQ fell 0.9%, bringing its cumulative two-week loss to 2.4%. The Dow rose 0.6%, its fourth straight weekly gain, while the S&P 500 inched up 0.1%. Despite the back-to-back losses, NASDAQ remains well ahead of the other two indexes for the year to date; NASDAQ is up 14.9% while the Dow and S&P are up 9.5% and 9.7%, respectively. European and Asian stocks were mostly negative for the second week in a row. In the Treasury bond market, yields were down by more than five basis points at the long end despite the Federal Reserve’s decision on Wednesday to raise short-term interest rates by a quarter percentage point, further flattening the yield curve between short and long rates. The yield on the benchmark 10-year note closed the week at 2.15%. Oil prices slid for the fourth week in a row, with U.S. crude landing at $44.74, down 2.4% for the week and more than 12% in the past month.
The Federal Reserve’s decision to raise short-term interest rates by another 25 basis points wasn’t a big surprise, but it does fly in the face of a slew of recent weak economic and inflation reports. “It’s important not to overreact to a few readings and data on inflation can be noisy,” Fed Chair Janet Yellen said at her post-meeting press conference. Yet the Fed’s updated forecast showed the “longer run” estimate for U.S. economic growth falling to 1.8% from 2.2% this year and 2.1% in 2018. That could call into question any further rate increases the rest of this year; the Fed had earlier indicated that one more increase is planned before yearend. Minneapolis Fed President Neel Kashkari, who wanted to keep rates unchanged, was the lone dissenter from the Fed action. The Fed also shed more light on its plan to unwind its $4.5 trillion bond portfolio. It will start by letting up to $6 billion in Treasury securities and $4 billion in mortgage bonds roll off as they mature, then gradually increase those amounts to $30 billion a month for Treasurys and $20 billion for mortgage-backeds. The Fed didn’t say how big it ultimately wants its balance sheet to be.
Indeed, reports on the American economy in May continued to come in weaker than expected. Retail sales fell 0.3%, the biggest one-month decline since January 2016, mainly due to cheaper gasoline prices but also weaker auto and restaurant sales. The Street had been expecting a 0.1% gain. Industrial production was unchanged, also less than expected, after increasing by 1.1% the prior month; manufacturing, the biggest component, fell 0.4%. Housing starts fell for the third straight month, falling 5.5% to an annual rate of 1.092 million, well below the 1.22 million consensus forecast. Permits were down by nearly 5% to 1.168 million. Not surprisingly, then, the National Association of Home Builders index fell two points in June to 67. Inflation numbers for May were modest. Consumer prices fell 0.1% for the month while producer prices were unchanged.
Reports/dates/facts/links worth paying attention to over the next week:
1. June 21: Existing home sales for May.
2. June 22: Weekly unemployment claims; leading economic indicators for May.
3. June 23: New home sales for May.