Markets grinded up last week even as tensions rose and economic data continued to show weakness. So, what is driving markets up?
Tensions escalated on two fronts last week. China fined Ford Motor Company for antitrust violations and opened an investigation into FEDEX. Two weeks ago, China announced it was going to establish a blacklist of companies that pose a threat to their companies. These actions seem to be the next step in that process.
At the beginning of the week, The US announced potential tariffs against Mexico. Through the week meetings were ongoing between the two nations to resolve the dispute, but no was reached prior to market close on Friday. At that point tariffs were set to kick in on June 10 (the following Monday). I deal was reached, but since it was after market close Friday, markets traded all week on the anticipation of potential tariffs against Mexico.
The first week of every month brings the all-important jobs report. This helps gives us a better gauge of hiring, inflation expectations, and optimism over the job market. The unemployment rate remained on changed at 3.6%, which is near a 50-year low, however the amount of jobs added was a lack luster 75K. Additionally the wage growth rate seems to have stagnated at 3.1%. Global PMI data fell to 49.8, 50 marks the line between contraction and expansion. This is the lowest global PMI readings since 2012. Additional US ISM Manufacturing PMI fell in May to 52.1 from 52.8. Both the International Monetary Fund and the World Bank lowered growth expectations for 2019.
The Federal Reserve Bank (FRB), in recent statements, has seemed more dovish. Meaning they are willing to consider rate cuts to help stimulate the economy should it continue to slow. After FRB Chairman Powell’s comments, markets have priced in a rate cut before year end, and potentially three before the end of next year. A quick acting FRB could help postpone a recession from occurring.
A rate cut brought markets to their feet and caused a nice little rally this week. After 4 weeks of pull back that equated to 6.6% in losses on the S&P 500 it was welcomed. We need to remember though that the FRB saying they stand at the ready to stimulate the economy means the economy is weak and may need assistance. This translates to weaker corporate earnings. It may prolong this growth cycle, but with a cost of meager growth.
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