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Week in Review

24 June 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending June 21, 2019


Capital markets around the world were awash with negative news last week. Tuesday, European Central Bank (ECB) chief Mario Draghi commented that the ECB would need to ease policy if inflation did not begin to increase. Mr. Draghi’s comments were a vindication to the markets, whose expectations have been for much weaker economic growth around the world.[i] Further supporting this view were comments from the Federal Reserve recognizing that economic growth had slowed, suggesting the next change in the Federal Funds rate was likely to be a reduction, however, rates were left unchanged. The Fed’s new outlook for interest rates indicates rates will hold steady this year and a cut may come next year.[ii] These two events were positive for equity markets as prices increased Wednesday afternoon and Thursday. Markets were up Thursday despite the news that Iran shot down a U.S. drone raising already heightened tensions between the two countries. Economic data out last week corroborates the view that the economy is much weaker than last year. The Empire State manufacturing index dropped 26.4 points, the largest monthly decline on record, to -8.6, the manufacturing sector in the state of New York is now contracting for the first time in more than two years. New orders and employment declined in early June. Additionally, the leading indicators within the index declined, thus the outlook for manufacturing activity is generally lower than it was in May.[iii]

The prices received index form the Philly fed Report has declined since February suggesting that companies do not have pricing power, so demand is falling. The Philly Fed Index showed the same trend in the manufacturing sector, though it is still expanding, but just barely.[iv] New orders and prices received remain positive, but they have declined to just above zero indicating falling demand similar to the Empire State manufacturing index. The IHS Markit Purchasing Managers’ Index® (PMI) for early June showed both the services and manufacturing sectors of the economy are barely growing. The manufacturing sector posted a weak 50.1 while services were at 50.7. Recall that a reading of 50.0 is the dividing line between expansion and contraction. Businesses within the index commented on less favorable conditions and an increase in risk aversion. The IHS Markit PMIs are at the lowest levels in more than three years.[v] Despite the rather negative tone of the economic data, equity markets increased last week, with U.S. large caps up about 2.2% and small caps rising about 1.8% on the hopes that the Fed would cut rates as early as their July meeting. This is not out of the realm of possibilities since we are experiencing waning inflation pressures and a slowing economy.


International developed market stocks increased by about 2.5% last week while emerging equities jumped about 4.9%. The positive news in emerging markets was increased optimism over U.S. and China trade negotiations.[vi] It was announced on Wednesday that President Trump and Chinese President Xi will meet at the G20 Summit this week spurring hopes that the trade war will begin to reduce the strain on global supply chains and economies. This news also helped developed market equities, which benefitted from Mario Draghi’s comments regarding further accommodative policy moves from the ECB. Following Mr. Draghi’s comments, the German 10-year bond fell to a yield of -0.30%, so investors who purchase the German 10-year are guaranteed to lose money on their “investment”.

Fixed Income

U.S. Treasury yields plummeted Wednesday following the Fed announcement with the 10-year benchmark falling to a low of 1.97%.  This is the first time the yield was below 2.0% since November 2016, the yield ended the week at 2.07%.[vii] Expectations of a Fed rate cut sent short term rates down more than the long end of the curve as the 3-month yield declined 9 basis points to 2.11% at the close on Friday. The yield curve remains inverted, but it flattened on the hopes of a rate cut.


Oil prices jumped 9% last week over fears that the U.S. would retaliate against Iran for the shooting of the military drone. The U.S. did not retaliate, but the Trump administration noted that the sanctions placed on Iran when the U.S. pulled out of the nuclear accord last year would be increased, putting additional stress on the Iranian economy.[viii] Gold prices increased last week following the news from Iran and the Fed meeting, topping $1,400 an ounce for the first time since September 2013.[ix] The prospect of central banks easing policy around the world has reduced interest rates globally and pushed gold prices higher.


The slowing economy and falling inflation pressures have given investors strong hopes of rate cuts this year. Last week policymakers gave the markets what it was looking for with comments from Europe and the U.S. that central bank policy could become more accommodating in the coming months. This change by the central banks pushed yields down around the world and sent equity prices strongly higher. In fact, U.S. large-cap stocks hit all-time highs last week.

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[i] CNBC (2019), Global Markets – ‘Super Mario’ Shock: Euro Slides, Yields Hit New Lows. Retrieved from
[ii] CNBC (2019), Here’s What the Stock Market Liked from the Fed. Retrieved from
[iii] New York Fed (2019) Empire State Manufacturing Survey, June 2019. Retrieved from
[iv] Philadelphia Fed (2019), Manufacturing Business Outlook Survey, June 2019. Retrieved from
[v] PMI by IHS Markit (2019), IHS Flash U.S. PMI ™. Retrieved from
[vi] CNBC (2019), Trump Says He and China’s Xi Spoke, Will Have ‘Extended Meeting Next Week’ at G-20. Retrieved from
[vii] U.S. Department of the Treasury (2019), Daily Treasury Yield Curve Rates. Retrieved from
[viii] CNBC (2019), Oil rises, Bringing Rally to more than 9% this Week. Retrieved from
[ix] CNBC (2019) Gold Breaches $1,400 as Dollar, Yields Plummet on Fed Rate-Cut Signal, Retrieved from

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