Friday, June 2, 2023
U.S. and International Equities
Equities finished the week higher across the board. This week’s approved debt ceiling agreement along with the possibility that the Federal Reserve is done tightening rates helped propel stocks.
There was some positive news on inflation this week. The ISM Manufacturing Index’s prices paid component declined in May, leaving the print below January’s level, as 85% of respondents stated prices have fallen or were unchanged. The Federal Reserve’s (Fed) Beige Book noted that price growth slowed across many districts. In addition, the Goldman Sachs Supply Chain Congestion Scale moved to pre-pandemic levels. Moreover, Mastercard (MA) and Yum Brands (YUM) noted in their earnings releases that price pressures are moderating.
For the last couple of months, the S&P 500 has been mostly range bound between 4,000 and 4,200. While the index did manage to briefly break through overhead resistance at 4,200, the index has not held that level. Market breadth has also been notably weak, with only about 40% of index constituents trading above their 200-day moving average.
Concentration has increased as the five largest companies now make up nearly a quarter of the S&P 500 Index. This year’s gains have been primarily driven by the technology-oriented mega-cap stocks. Year to date, the S&P 500 index is up over 12% but the equal weighted index is up only 1.59%.
Fixed Income Higher
The Bloomberg Aggregate Bond Index finished higher as bond prices increased while yields declined. High-yield corporate bonds, as tracked by the Bloomberg High Yield Index, also ended the week higher. Bond investors believe that the Federal Reserve is probably finished raising rates as inflation is showing signs of easing.
According to data released this week, residential mortgage applications fell for a third consecutive week, with a 3.7% decline for the week ended May 26 after a decline of 4.6% in the prior week. Additionally, home refinances fell 6.9% through May 26 after falling 5.4% in the prior week. With the average 30-year fixed rate at 6.91%, mortgage supply is likely going to be weak for the near term, which should provide support for mortgage-backed security (MBS) prices. Presently, LPL Research has a favorable view of Agency MBS.
Investment grade corporate debt underperformed the broader Bloomberg Aggregate Bond Index in May with the utility sector as the biggest laggard. Despite the ongoing concerns about financial institutions, the financials sector outperformed the other broader sectors. LPL Research is still generally negative on investment grade credit, but we believe the short-to-intermediate parts of the corporate credit curve are attractive.
Energy prices finished lower this week while the major metals, gold, silver, and copper finished the week on a positive note. The Bloomberg Commodities Index has fallen 13% year to date, led by a decline in natural gas (-58%) and industrial metals (-15%), with precious metals (+5%) finding some support.
The case for commodities as an inflation hedge is less compelling with inflation likely to continue its steady decline in the months ahead. LPL Research prefers precious metals as a hedge against geopolitical risk and as a way to position for a potentially weaker U.S. dollar.
Economic Weekly Roundup
U.S. May Manufacturing
U.S. manufacturing declined for a seventh straight month in May with weakness in new orders. That being said, factories boosted employment to a nine-month high. The Institute for Supply Management (ISM) reported that its manufacturing PMI fell to 46.9 last month from 47.1 in April. It was the seventh straight month that the PMI is below the 50 threshold, indicating contraction in manufacturing, and is the longest such stretch since the Great Recession.
Weak PMI readings support many economists’ expectations that the economy may enter into recession this year. However, there have been time periods, such as the mid-1990s as well as mid- and late-1980s, when prolonged readings of the PMI below 50 did not lead to a recession.
South Korea April Manufacturing and Retail Sales
South Korean manufacturing output declined 1.2% month over month in April. Annualized, manufacturing output declined 8.9% year over year. The report highlighted that South Korea is feeling the effects of decreasing global demand alongside other export-focused economies, such as Taiwan and China. In addition, the nation’s retail sales dropped 2.3%, marking its first monthly decline since January.
April Taiwan Exports
Taiwan’s economy continues to suffer from decreased global demand as exports fell for the eighth consecutive month. During the month of April exports dropped by 13.3% month over month. Electronics, one of Taiwan’s largest economic sectors, is particularly affected by decreasing demand from the United States and Europe. Other large sectors, such as plastics and rubber, chemicals, and machinery were also affected by disappointing demand. Global demand will need to increase significantly before Taiwan is able to complete its economic recovery.
Japan May Factory Report
Japan’s factory activity expanded in May for the first time in seven months amid increases in output and new orders. Both output and new orders reached their highest levels in 12 and 13 months, respectively, as business and consumer confidence lifted demand. In addition, service-sector activity expanded at the strongest pace on record last month amid a pickup in domestic and international tourism. So far, Japan seems to have resisted the impact of slowing global economic conditions given a recovery in the nation’s services sector activity.
U.K. Retail Sales
United Kingdom retail spending increased in April by 0.5% month over month, aided by government payments. Jewelers, sports retailers, and department stores performed well. Despite higher food prices, supermarkets also grew month over month. Meanwhile, automotive fuel stores’ sales decreased from a slight gain in March. The spending was aided by an increase in government benefits, as payments increased relative to the 10.1% inflation rate of September 2022. Investors should know that this growth is seen to be the start of a potential trend, with consumer spending expected to grow as part of the wider recovery later this year.
Weekly Unemployment / May Jobs Report
Initial and continuing claims for the latest week came in below economists’ expectation and modestly higher than last week’s report. The labor market is expected to further loosen over the coming months as companies respond to slowing demand triggered, in part, by the Fed’s tighter monetary policy.
May’s unemployment rate increased by 0.3 percentage point to 3.7%, which represent the highest rate since October. Company payrolls grew by 339,000 in May as April estimates were revised higher to 294,000. Job gains were broad-based and occurred in professional and business services, health care, construction, and social assistance services. Labor participation rates were roughly unchanged. Wages grew 4.3% from a year ago, a healthy clip but not high enough to incite inflationary pressures.
The following economic data is slated for the week ahead:
- Monday: BEA Total Light Vehicle Sales (May), PMI Composite (May), durable orders (Apr), factory orders (Apr), ISM Services PMI (May)
- Wednesday: Trade balance (Apr), consumer credit (Apr)
- Thursday: Weekly initial and continuing unemployment claims, wholesale inventories (Apr)
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