U.S. stocks were lower for the second week in a row last week, as the economic outlook appeared to be brightening, bringing with it the prospect of an interest rate increase by the Federal Reserve.
The Dow Jones Industrial Average lost 0.9% while the S&P 500 shed 0.7%. NASDAQ recorded a fractional loss. Stocks were mostly lower on Friday after the Labor Department said nonfarm payrolls rose by 280,000 in May, 60k more than the consensus forecast, while private employers added 262,000, also well above the Street forecast. The unemployment rate rose a tick to 5.5%. The better-than-expected report led investors to speculate that the Fed’s first rate increase since 2006 isn’t far off, perhaps not at its June 16-17 meeting but increasingly likely in September.
The bond market seemed more convinced of that happening, as yields on U.S. Treasury bonds soared to their highest levels in eight months. On Friday the yield on the 10-year T-note jumped nearly 10 basis points after the jobs report to close the week at 2.41%, up 29 bps on the week and its highest level since last October. The 30-year bond closed at 3.11%, up 23 bps on the week. As a result, the Barclays U.S. Bond Market Aggregate dropped 1.4%, pushing the index into negative territory (-0.4%) for the year to date. But Treasury bonds did better than their German counterparts, where yields continued to spike. The yield on the benchmark 10-year bund closed the week at 0.85%, up 36 bps on the week, after hitting an even 1% on Thursday, its highest level since last September, after European Central Bank President Mario Draghi said the markets should get used to volatility. The yield on the 10-year bund has surged over the past six weeks after hitting an all-time low of 0.05% in mid-April. Interest-rate sensitive stocks like utilities (-4.1%) and telecoms (-2.4%) were the worst performers last week.
European stocks lost ground for the second week in a row and the third time in the past four weeks as the Greek bailout drama dragged into another month without signs of a resolution. The broad-based Stoxx Europe 600 dropped 2.7% last week after losing nearly 2% the week before, while Germany’s DAX index fell almost 2% following the previous week’s 3.4% plunge. The prior week’s optimism for a Greek debt deal largely evaporated as the week drew on. On Friday Prime Minister Alexis Tsipras called the proposal from the country’s international creditors “unrealistic” and “a bad negotiating trick,” just a day after he said a deal was “within sight.” On Thursday Athens notified the International Monetary Fund that it was deferring a 300 million-euro ($337 million) payment due last Friday and bundling it with three more payments totaling 1.5 billion euros due at the end of the month. That certainly raised the heat on both sides to make a deal quickly.
While most other markets were falling, China’s stock market continued to roar ahead. The Shanghai composite index jumped nearly 9% in local currency, rebounding sharply from the previous week’s 1% dip, to close above 5000 for the first time in more than seven years. There was no particular news driving the index higher last week, rather a continuation of the market’s year-long rally. But other Asian markets were lower. Japan’s Nikkei 225 fell 0.5%, its first down week in the past four, while Hong Kong lost 0.6%, its second straight losing week. India’s Sensex index lost nearly 4%.
Reports/dates/facts/links worth paying attention to over the next week:
- June 10: U.S. Treasury budget report for May; 10-year Treasury note auction.
- June 11: Weekly unemployment claims; retail sales for May.
- June 12: Producer price index for May; University of Michigan consumer sentiment index for June.
Copyright © 2015 by Wright Investors’ Service, Inc. The views expressed in this blog reflect those of Wright Investors’ Service, Inc. and are subject to change. Statements and opinions therein are based on sources of information believed to be accurate and reliable, but Wright Investors’ Service, Inc. makes no representations or guarantees as to the accuracy or completeness thereof. These views should not be relied upon as investment advice.