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Weekly Market Review

09 July 2019

Clint McGarvin, CFA® | Portfolio Manager/Research Analyst

Week Ending July 5, 2019

U.S.

U.S. stocks increased last week as large caps rose about 1.7% and small caps increased by about 0.6%. The move higher was likely based on continued improvement in the manufacturing and services sectors of the economy as well as jobs growth exceeding expectations. Operating conditions in the manufacturing sector improved slightly in June relative to May as both the Institute for Supply Management (ISM) manufacturing index[i] and the Markit manufacturing PMI[ii] held above 50.0 in the month. The ISM manufacturing index did decline slightly to 51.7 from 52.1, so the pace of improvement continues to slow, while the Markit manufacturing PMI accelerated to 50.6 from 50.1. Similarly, new orders are still increasing but are at or just above the 50.0 mark indicating that the sector should continue to grow over the next few months at least. The services sector also expanded in June, but the pace of growth is slowing relative to May and the last 12-months.[iii] The highlight of the week was nonfarm payrolls which showed job growth accelerated in June to 224,000 from 72,000 in May.[iv] Monthly nonfarm payrolls are rather volatile, so it is more instructive to study the 6-month average payroll growth. The 6-month average reached a peak July last year at 236,000, but it has been declining consistently since October and now sits at 172,000 jobs added on average and is now at the lowest level since November 2011. Labor markets are showing the same trend as the manufacturing and services sectors of the economy, they are slowing, but the June jobs report was positive.

International

International developed stocks rose about 0.65% while emerging markets stocks were flat on the week. Early in the week, stocks in both sectors were moved by any news regarding U.S. – China trade negotiations. However, expectations of U.S. labor market news drove the markets later in the week. The solid jobs number Friday drove the dollar higher and reduced Fed rate cut expectations, which sent European stocks down. China and other emerging markets were closed Friday, July 5 when the labor number was released, the impact showed up in markets July 8 with China shares falling about 2.6% while other markets in Asia were down about 1% to about 2.2% on the day. Performance in Chinese markets was also hit by the decline in the Chinese manufacturing sector, where according to IHS Markit, fell from 50.2 in May to 49.4 in June.[v] Leading indicators such as new orders and employment showed declines last month. However, the pace of growth is only slightly in contraction territory and recent government policies could be hampering activity. Chinese services also slowed in June to 50.6 from 51.5 in May as new business and employment declined in the month.[vi] Europe showed growth in the services sector[vii] but the contraction in manufacturing[viii] in June, as services accelerated from 52.9 to 53.6 but manufacturing slowed further from 47.7 in May to 47.6 in June.

Fixed Income

Treasury yields declined most of last week, but following the nonfarm payrolls data, longer-dated yields shot up. The 10-year yield rose to 2.04% Friday from 1.96% Thursday and 2.0% June 28. The short end of the yield curve increased more as the 3-month jumped from 2.12% to 2.23% over the week. The rise in yields was in response to the strong jobs data that, once again, likely decreased the probability of a rate cut.

Summary

The strong jobs number out on Friday reduced hopes of a Fed rate cut but it showed, at least temporarily, the labor markets and by extension, consumer spending will likely continue to grow over the next few months. The manufacturing and services sectors and job growth data suggest slowing when we look at the longer term. Based on economic indicators, the trade war between China and the U.S. is hampering growth. As the fear of a more pronounced slowdown from the trade war mounted, gold prices increased while oil prices declined for the week. Also, as U.S. yields dropped the U.S. dollar also fell, but that reversed somewhat on Friday following the jobs data which clearly eased fears of a more pronounced slowdown in the U.S. However, Europe and China are slowing more than the U.S. but the services sectors in both regions are holding up better than manufacturing and both regions are also enacting more stimulus plans to ward off further slowing.


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[i] Institute for Supply Management (2019), June 2019 Manufacturing ISM® Report on Business. Retrieved from https://www.instituteforsupplymanagement.org/ISMReport/MfgROB.cfm
[ii] Markit Economics (2019) HIS Markit US Manufacturing PMI™. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/53d67f8f09fc416791d73ca523b3c5e7
[iii] Markit Economics (2019), IHS Markit US Services PMI™. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/7b46f55c910c47218941660e4b932e9f
[iv] Bureau of Labor Statistics (2019), The Employment Situation – June 2019, Retrieved from https://www.bls.gov/news.release/pdf/empsit.pdf
[v] Markit Economics (2019) Caixin Purchasing Managers’ Index™. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/7081cdf2121749cb9b12e78b9c28edf1
[vi] Markit Economics (2019) Caixin Purchasing Managers’ Index™. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/0b31d26dbe4a41a4afeb9d9d8175b0b0
[vii] PMI by IHS Markit (2019), IHS Markit Eurozone Composite PMI® – final data. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/006e6688b50348e88796968e77580bf5
[viii] PMI by IHS Markit (2019), IHS Markit Eurozone Manufacturing PMI® – final data. Retrieved from https://www.markiteconomics.com/Public/Home/PressRelease/52c623205f25490ab65c895834f78408
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