Week in Review May 26, 2017
U.S. stocks got back on the winning track last week as the markets headed into the Memorial Day weekend and the unofficial start of summer.
After falling the previous two weeks, both the Dow and the S&P 500 gained about 1.4% on the week. NASDAQ, which fell 0.6% the prior week, its first decline in five weeks, rose more than 2%. Small-cap stocks, as measured by the Russell 2000, rose 1.1%, their first increase in four weeks. Markets were buoyed somewhat by the release of the minutes of the Federal Reserve’s May meeting, which indicated that the Fed is likely to stay on track and raise interest rates “soon,” which most observers expect means next month. Treasury bond yields were up marginally for the week.
Asian stocks continued higher while European stocks were a little weaker. The Shanghai composite rose 0.6% despite Moody’s downgrading the Chinese government’s credit rating for the first time since 1989, citing growing debt loads. Hong Kong’s debt rating was also lowered, but the Hang Seng index still picked up 1.8%. Hong Kong stocks are up more than 16% in local currency terms so far this year, while Shanghai is basically flat. Japan’s Nikkei 225 rose 0.5% after falling the previous week for the first time in five weeks. The Stoxx Europe 600 was down marginally while German stocks slipped 0.3%.
The first revision of first-quarter U.S. GDP came in stronger than expected, but most of the week’s economic reports showed lackluster growth, including in critical areas like housing. The Commerce Department upgraded Q1 economic growth to 1.2% from the 0.7% originally reported, although that still lags the 2.1% pace in the previous quarter, never mind the 3%-plus rate the Trump administration promises and most people would like to see. The report also said corporate profits fell by 0.3% compared to Q4 following four straight quarterly increases. Elsewhere, the Chicago Fed’s national activity index rose in April to 0.49 from a relatively flat 0.07 reading in March, but durable goods orders fell 0.7%, down from an upwardly revised 2.3% surge the previous month. Core capital goods, which measures business spending, showed no change for the second straight month. Housing sector reports worsened in April. Existing home sales, the largest category, fell 2.3% to an annual rate of 5.57 million units after climbing by 4.2% in March, while purchases of new homes dropped 11.4% to 569,000 even as builders cut prices to attract buyers. The University of Michigan’s consumer sentiment index ended May at 97.1, down slightly from the prior month.
Despite those relatively weak economic reports, the Fed indicated that it might raise interest rates again “soon,” which many believe means as early as next month’s meeting. “Most participants judged that if economic information came in about in line with their expectations it would soon be appropriate for the committee to take another step in removing some policy accommodation,” the minutes from the Fed’s monetary policy meeting of May 2-3 said. The Fed’s next meeting is June 13-14. The Fed minutes also shed a little light on how it plans to start unwinding its $4.5 trillion bond portfolio. The proposal calls for allowing a small, preset dollar amount of its portfolio to run off beginning later this year rather than reinvesting the proceeds as it does now, then gradually increasing the amount each quarter. The Fed has no plans to actually start selling any of its holdings, which include Treasury and mortgage-backed securities.
Reports/dates/facts/links worth paying attention to over the next week:
1. May 29: U.S. markets closed for Memorial Day.
2. May 30: Personal income and outlays for April; S&P Corelogic Case-Shiller home price indexes for April; Conference Board consumer confidence index for May.
3. May 31: Pending home sales for April; Federal Reserve Beige Book.
4. June 1: Weekly unemployment claims; ADP national employment report for May; motor vehicle sales for May; ISM manufacturing composite index for May; construction spending for April.
5. June 2: Employment situation for May.