Week's Highlights: June 12 - 16, 2017

Monday, June 19, 2017

Global equities were rather flat for the week overall. The Dow Jones Industrial Average and the S&P 500 each set record highs midweek. The DJIA held enough to close appreciably positive for the week, but the S&P ended only minimally higher. Their gains were offset by NASDAQ’s loss.

Among the notable headlines investors dealt with during the week were a shooting during a GOP baseball practice for an annual Congressional game for charity, the FOMC's latest rate-hike decision, weak May CPI and retail sales, the scope of Special Counsel Mueller's investigation broadening to examine whether Trump tried to obstruct justice and Amazon’s takeover of Whole Foods. The last of these items shattered all other grocery chain (e.g., Costco, Kroger, Target and Walmart) and many other consumer staples stocks on Friday. The deal is credited with the loss of approximately $40 billion in market capitalization to the 20 biggest retail and food sector losers on Friday.

Yield on the US 10-year Treasury note ended at 2.16%, down from the prior week’s 2.20%. That 2.20% started at 2.16% another week back – so we’ve gone nowhere over the last two weeks.

Oil prices fell for a fourth consecutive week, losing another 2% and hitting a 6-month low on Thursday. West Texas Intermediate (WTI) ended the week at $44.74, down from the prior week’s $44.83. Global Brent dropped to $47.33 from the prior week’s $48.16. OPEC May output jumped by 336,000 bpd on increases in Libya, Nigeria, and Iraq. The US added 6 more producing rigs last week, extending that record streak to 22 weeks.

Volatility (as per the Chicago Board Options Exchange Volatility Index, or VIX) fell slightly last week, from 10.9 to 10.4.



May retail sales showed their biggest drop in 16 months. They fell 0.3% amid declining purchases of motor vehicles and discretionary spending. April’s numbers were unrevised at a 0.4% increase. May's decline was the largest since January 2016, underperforming economists' expectations for + 0.1%. May’s retail sales were up by 3.8% on a year-over-year basis. Lower gas prices accounted for some of the May drop, but retail sales overall showed widespread weakness.

The Labor Department May CPI unexpectedly also fell. The CPI was weighed down by declining prices for gasoline, apparel, airline fares, communication and medical care services, among others. It was the second drop in the CPI in three months. The CPI rose 1.9% over the last full 12 months, its smallest increase since last November. Core CPI (strips out food and energy) rose 0.1%, matching April’s rise, and 1.7% on a year-over-year basis, the smallest rise since May 2015.

Over 2/3 of our economy comes from consumer spending. May’s weak retail sales could temper expectations for a sharp acceleration in economic growth in the second quarter. The economy grew at a 1.2% annualized rate in Q1, held back by a near stall in consumer spending and a slower pace of inventory investment. Taking retail sales and CPI together suggests a softening in domestic demand that could limit the Federal Reserve's ability to continue raising interest rates this year.

Several other “unencouraging” economic measures were released.

May PPI was unchanged from April, matching expectations however.

May Import prices slipped by 0.3% versus expectations for a 0.1% decline.

May housing starts fell by 5.5%, coming in at 1.092 million units versus expectations for 1.215 million. (This followed an April 2.7% and March 7.7% falls.) Home construction is still 3.2% ahead of last year, but too little to address the dwindling supply of homes. Building permits, an indication of future housing starts, fell by 4.9% to 1.17 million.

Preliminary June consumer sentiment 94.5 versus 97.1 expected.

The Federal Reserve hiked rates last Wednesday – raising the fed funds target range by 25 basis points to 1.00%-1.25% – in spite of falling inflation data. Fed chair Yellen attributed the recent inflation decline to ‘one-off’ factors (such as falling prices for cell phone service and prescription drugs). Further, the FOMC said that it expects inflation to stabilize around the committee’s 2% target in the medium term. Further, it indicated it will likely hike rates once more this year.

The Fed also spelled out its framework for shrinking its massive balance sheet. Beginning later this year, it will initially allow $10 billion in securities to mature each month, $6 billion in Treasuries and $4 billion in mortgage and agency debt. It will gradually increase that monthly amount to $50 billion.

Although the Fed expects a third rate hike in 2017, the fed funds futures market disagrees. It points to the March 2018 FOMC meeting as the most likely time for the next rate-hike announcement. March has an implied probability of 50.8%, which is lower than the prior week's 60.7%. The implied probability of a December rate hike is now 43.4%, down from 51.7 a week earlier.

D.C. garnered its usual amount of attention last week. Among the notable headline events, a Washington Post report that claimed Special Counsel Mueller's investigation of Russia's interference in the U.S. election is broadening in scope to examine whether President Trump tried to obstruct justice. Late in the week, the Trump administration announced a revised Cuba policy that will tighten rules on Americans traveling to Cuba and restrict US companies from doing business with entities controlled by the Cuban military. Exceptions will be made for US air carriers and cruise lines.

The Wall Street Journal; The Wall Street Journal Online; Bloomberg News; BBC News; The Associated Press; Reuters.com; Crain’s New York Business; MFS research; NYSE; NASDAQ; Dorsey-Wright Associates; NYMEX.com; CNBC’s Power Lunch & Squawk Box programs; Investing.com; Markit.com; the New York Times; Standardandpoors.com; Djindexes.com; 247wallstreet.com; MarketWatch.com; Morningstar.com; Thomsonreuters.com; the Financial Times.com; Briefing.com; BusinessWeek.com; Dol.gov; Fxstreet.com; Streetinsider.com; Ycharts.com;
The data above were taken from sources deemed reliable. However no guarantee can be made as to their completeness and accuracy.
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