U.S. stocks got back on the winning side, with the major indexes up slightly on the week heading into the long Memorial Day weekend.
The Dow and the S&P 500 gained 0.2% and 0.3%, respectively, while NASDAQ rose 1.1% following the prior week’s modest losses. But Japanese and European stocks ended their eight-week winning streak, as the Nikkei 225 dropped 2.1% while the Stoxx Europe 600 fell 0.9%. Italian stocks continued to get hammered, as the FTSE MIB index plunged 4.5%; the index is down nearly 9% since May 7, when it hit its highest level in more than 10 years. Oil prices plunged more than 4% on Friday and 5% for the week after Saudi Arabia and Russia moved closer to reaching a deal to increase oil production following more than a year of withholding crude from the market.
Renewed worries about trade and the status of U.S. talks with North Korea pushed investors into high-grade sovereign bonds, where yields dropped by double digits. In the U.S. the benchmark 10-year Treasury note ended the week at 2.93%, down 13 basis points on the week despiteindications from the Federal Reserve that an interest rate hike is a near certainty next month. However, the minutes of the Fed’s May 1-2 meeting also showed that the Fed is less worried about inflation running faster than its 2% target, mitigating concerns that the Fed might have to accelerate its rate hike schedule. In Europe, the yield on the benchmark 10-year German bund dropped sharply as investors continued to flee Italian bonds. The bund yield dropped 17 bps to 0.41%, its lowest level this year, while the comparable Italian security jumped more than 30 bps for the second week in a row, closing Friday at 2.55%, which is up nearly 80 bps so far this month.
Housing reports were negative in April as mortgage rates continued to spike higher. Sales of existing homes fell 2.5% to an annual rate of 5.46 million, below the 5.6 million forecast. Lawrence Yun, the National Association of Realtors’ chief economist, said there is still “strong demand” for homebuying despite rising interest rates, but the “root cause of the underperforming sales activity continues to be the utter lack of available listings on the market. Inventory shortages are even worse than in recent years, and home prices keep climbing above what many home shoppers are able to afford.” The median price of an existing home price rose 5.3% versus a year ago to $257,900. Sales of new homes fell 1.5% to an annualized rate of 662,000, well below the 677,000 forecast and down 10,000 from March’s downwardly revised figure of 672,000. The average rate on a 30-year mortgage rose to 4.66% last week, up nearly three-quarters of a percent since the beginning of the year, making it “the most sustained increase to start the year in over 40 years,” according to Freddie Mac.
Outside the housing sector, the headline durable goods orders number for April fell 1.7%. But that was skewed by a 29% decline in the volatile civilian aircraft area. Otherwise, ex-transportation, orders rose a better-than-expect 0.9% following no change the previous month. Likewise, core capital goods orders, a proxy for business spending, rose a full percentage point, offsetting March’s downwardly revised 0.9% decline. The University of Michigan’s consumer sentiment index ended May at 98.0, down a point from the mid-month reading.
Reports/dates/facts/links worth paying attention to over the next week:
1. May 28: U.S. markets closed for Memorial Day.
2. May 29: S&P Corelogic Case-Shiller home price index for March; Conference Board consumer confidence index for May.
3. May 30: First quarter GDP, first revision; ADP national employment report for May; Federal Reserve Beige Book.
4. May 31: Weekly unemployment claims; personal income and outlays for April; pending home sales for April.
5. June 1: Employment situation for June; Institute for Supply Management manufacturing composite index for May; construction spending for April; motor vehicle sales for May.
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