U.S. stocks were widely mixed last week in a trading session dominated by central bank announcements and trade war fears.
The Dow fell 0.9%, its biggest weekly loss since March, while NASDAQ gained 1.3% and the S&P 500 finished mostly unchanged. Treasury bond yields also finished mixed. Short-term yields were higher as the Federal Reserve raised interest rates and indicated more to come, while long-term yields fell as investors sought safety following heightened fears of a trade war between the U.S. and China. The yield on the two-year Treasury note rose seven basis points on the week to 2.56% while the 10-year note fell three bps to 2.92%. The yield spiked back to 3.00% immediately after the Fed meeting before dropping sharply again.
Central banks grabbed center stage, with the Fed and the European Central Bank announcing moves away from accommodation. As expected, the Fed raised the federal funds rate by another quarter point, to 2%, its highest level since the 2008 financial crisis, while signaling the likelihood of two more rate hikes later this year. In its post-meeting statement, the Fed said it “expects that further gradual increases in the target range for the federal-funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the committee’s symmetric 2% objective over the medium term.” Eight of the 15 Fed members said they expect two more rate increases this year, up from seven members in March and four in December. A day later, the ECB said it would reduce its bond purchases to €15 billion in October from a current €30 billion a month and then stop entirely at the end of the year. However, the ECB left interest rates unchanged and said it didn’t expect to start raising them until “at least through the summer of 2019.” The Bank of Japan also left rates unchanged at its meeting on Friday. “It is appropriate for Japan to patiently continue current monetary easing,” Gov. Haruhiko Kuroda said. “The divergence of monetary policies [with the Fed and the ECB] reflects different economic and price conditions in each country.”
European stocks were mostly higher while the euro fell against the dollar. The Stoxx Europe 600 rebounded 1.0% following three straight weekly losses. German stocks gained nearly 2%. Italian stocks jumped nearly 4% after dropping 13% over the previous five weeks. Italian government bonds also rebounded, with the yield on the 10-year bond falling 50 basis points to 2.61%. The euro ended the week at $1.16, down about a penny from the prior week. Chinese stocks were lower. Oil prices continued to drop, with U.S. crude ending the week at $64.38, down 2% on the week and down more than 10% since May 22.
Inflation jumped in May, fueling the Fed’s inclination to raise interest rates. Consumer prices rose 0.2% from April but 2.8% compared to a year earlier, the highest year-on-year growth rate in more than four years. The core rate, excluding food and energy, rose 2.2% on an annual basis. Likewise, producer prices rose 0.5% for the month and 3.1% YOY, while the core rates were up a respective 0.3% and 2.4%. Elsewhere, retail sales jumped 0.8% in May, well ahead of the consensus forecast of 0.4%. On a down note, industrial production fell 0.1%, but that was skewed downward by a 6.5% decline in automobile output, which dragged down manufacturing by 0.7%; the decline was largely due to a fire at a major Ford supplier. The University of Michigan’s mid-June reading of consumer sentiment came in at a better-than-expected 99.3, up from May’s final reading of 98.0.
Reports/dates/facts/links worth paying attention to over the next week:
1. June 18: National Association of Home Builders housing market index for June.
2. June 19: Housing starts for May.
3. June 20: Existing home sales for May.
4. June 21: Weekly unemployment claims; leading economic indicators for May; Philadelphia Fed business outlook survey for June.