Weekly Newsletter June 23rd to June 27th
RECAPPING LAST WEEK
The S&P500 and Nasdaq Composite indices ascended to new weekly all-time closing highs, rising 3.4% and 4.3%, respectively, and completing a remarkable comeback from the spring’s tariff induced turmoil. The Russell 2000 index and international stocks also rose around 3%, boosted by prospects of lower interest rates. Eight of eleven S&P500 sectors finished positive, led by strong gains in technology and communications. Financials rose 3% after the Federal Reserve voted to begin enacting steps to relax leverage rules for banks. Crude oil tumbled 12% to $65.14 as the lack of significant supply disruptions from the Israel-Iran conflict caused the risk premium to collapse. Gold futures also fell despite the continued slide of the U.S. dollar, which sank to its lowest level in more than three years. Increased expectations for interest rate cuts are pressuring the greenback along with concerns about the Federal Reserve’s independence. U.S. Treasury yields slid to two-month lows with the 10-year note falling 10 basis points to 4.28%. In Congressional testimony, Fed Chair Powell said he does not foresee a rate cut in July as two of his colleagues have recently suggested, preferring to wait for June and July’s inflation readings for any signs of tariff-related price increases. Turning to economic data, the core PCE price index increased only slightly in May, inching up to 2.7% YoY. Signs of a slowdown in consumer spending emerged, dropping 0.1% last month. Additionally, the final reading of Q1 GDP was revised lower to -0.5% from -0.2% after a sharp downgrade to the consumer spending component. U.S. business activity slowed marginally in June, according to the latest S&P Global flash PMI report. The composite index fell to 52.8 from 53.0 while the prices subcomponent continued to rise, suggesting a potential inflation acceleration later this year. U.S. consumer confidence fell unexpectedly this month, reflecting concerns about the jobs market and overall economic conditions. The housing market remained hampered by both high home prices and mortgage rates. In May, the median price for an existing home sold was $422,800, even with a big jump in supply. Meanwhile, new home sales fell by the most in three years as builder inventories rose due to higher material costs and a slowing labor market. Overseas, the NATO summit in the Netherlands ended with positive outcomes—the U.S. committed to the fundamental principle of collective defense while other nations backed a larger financial commitment. Business activity in Germany returned to growth in June with new manufacturing orders increasing by the most in three years. Sentiment surveys for businesses and consumers showed an uptick in optimism for the German economy. Australia’s monthly inflation gauge cooled in May, opening the door to a potential rate cut as soon as next month. Finally, core CPI in Japan’s capital slowed in June, but rising food prices will likely keep expectations for rate hikes alive.
THE WEEK AHEAD
U.S. markets will shutter early on Thursday and be closed on Friday for the Independence Day holiday. The shortened week’s economic calendar features the monthly U.S. jobs data. With differences of opinion starting to emerge among FOMC members on the timing of rate cuts and pressure on the Fed building from the White House, this employment report may hold more weight compared to recent months. The Atlanta Fed GDPNow model is currently estimating Q2 growth of 2.9%, but economists caution that the large gyrations in import data may mask underlying softening activity that has shown up in recent housing, labor, and consumer spending data. Thursday’s non-farm payrolls for June are expected to be around 120,000 added jobs with the unemployment rate ticking up to 4.3%. ADP private payrolls, JOLTS job openings, and Challenger job cuts figures will arrive earlier in the week. Elsewhere, Fed Chair Powell and other central bank heads are scheduled to participate in a panel session on Tuesday at the European Central Bank Forum in Portugal. The rest of the domestic economic calendar includes ISM manufacturing and services PMIs along with factory orders. On the international side, the Eurozone’s preliminary CPI for June will be released early this week and is expected to remain at or near the central bank’s 2% annual target. China’s manufacturing and services PMIs and Japan’s Tankan indices are the other releases of note.
CHART OF THE WEEK
Emerging from the ashes
The MSCI Emerging Markets index (MXEF) rose another 3% last week and has now gained 24% since the Liberation Day lows. International markets are benefitting from a move away from U.S. dollar-denominated assets, and emerging markets in particular have seen strong inflows to their commodity-based economies. The U.S. Dollar index ($DXY) broke below technical support last week on mounting concerns over monetary and fiscal policies, while commodities such as copper made another run at record highs. Emerging economies have thus far minimized the impact from U.S. tariffs as exporters in both Latin America and Asia have been able to redirect their goods to other countries. The ceasefire agreement between Israel and Iran—tenuous as it might be—has also helped boost risk appetite for emerging market assets. PIMCO said last week that emerging markets are enjoying a “Goldilocks” moment with strong capital inflows, low valuations, and broad-based rallies in technology, energy, and financials. MXEF started gaining relative strength versus the S&P500 in January, a trend that still looks to be very early in its development.
Source: Charles Schwab Corporation
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