U.S. stocks took a breather last week after jumping more than 2% the previous week.
Both the Dow and the S&P 500 lost 0.5% while NASDAQ fell 0.7% for the week. But small caps, as measured by the Russell 2000 index, continued to rally, climbing 1.2% after rising 2.6% the prior week. The Dow is now slightly negative for the year while the S&P is up 1.5%. NASDAQ and the Russell are doing much better, up 6.5% and 5.9%, respectively.
Investors continued to worry about the rise in long-term bond yields, as the 10-year Treasury note blew past the 3.0% mark. The yield on the benchmark security ended the week at 3.06%, up nine basis points on the week, but not before hitting 3.12% on Thursday, its highest level in seven years. Likewise, the yield on the 30-year bond ended Friday at 3.20%, up 10 bps on the week after reaching 3.26% the day before. The yield on the 10-year note is now up 65 bps since the beginning of the year. Yields on the short end of the curve were unchanged.
Stocks outside the U.S. were mostly higher in local currency terms and the dollar continued to strengthen. Japan’s Nikkei 225 (+0.8% last week) and the Stoxx Europe 600 (+0.6%) both rose for the eighth straight week. Chinese stocks were up for the fourth consecutive week. But Italian stocks, which had been one of the better performers so far this year, fell nearly 3% after two anti-establishment parties, which are trying to form a governing coalition, announced plans to cut taxes and scrap pension reforms. That put added pressure on Italian government bond yields, which have spiked in recent weeks. The 10-year sovereign bond jumped 34 basis points last week to close Friday at 2.22%, its highest level in nearly a year and up 45 bps since May 7. The euro remained weak, falling below $1.18, down more than 1% on the week; the currency has dropped more than 5% against the dollar since March 26, when it was worth about $1.25.
Last week’s reports on the U.S. economy were mostly positive. Retail sales climbed 0.3% in April following an upwardly revised 0.8% gain in March. Industrial production jumped 0.7% for the second straight month after March’s rise was revised upward from 0.5%. The capacity utilization rate rose 0.4 percentage point to 78%, its highest level in three years. The Conference Board’s index of leading economic indicators rose 0.4%, in line with expectations and duplicating the previous month’s increase. “April’s increase and continued uptrend suggest solid growth should continue in the second half of 2018,” the firm said. However, it noted, the six-month growth rate “has recently moderated somewhat, suggesting growth is unlikely to strongly accelerate.” On a down note, housing starts fell 3.5% to an annual rate of 1.287 million, led by an 11.3% decline in multifamily starts although the residential sector was also down. Permits, a forward indicator, fell 1.8% to 1.352 million. The National Association of Home Builders’ housing market index rose two points in May to 70 after being downwardly revised a point in April. The group reported “growing consumer demand for single-family homes” but said “the record high cost of lumber is hurting builders’ bottom lines and making it more difficult to produce competitively priced houses for newcomers to the market.” Higher mortgage rates certainly won’t help: The rise in bond yields pushed up the average rate on a 30-year mortgage to 4.61%, up more than 60 bps this year, which could put further pressure on a richly-priced housing market.
Reports/dates/facts/links worth paying attention to over the next week:
1. May 21: Chicago Fed national activity index for April.
2. May 23: New home sales for April; the minutes of the Federal Reserve’s monetary policy meeting of May 1-2 are released.
3. May 24: Weekly unemployment claims; existing home sales for April.
4. May 25: Durable goods orders for April; University of Michigan consumer sentiment index for May, second reading.