More Trade-Offs

The major domestic equity benchmarks closed flat to lower last week. The narrowly focused Dow performed worst, hurt by its focus on industrial firms and exporters as trade conflicts deepened. The tech-focused Nasdaq fared better and reached a new record high at midweek, as did the small-cap Russell 2000. Within the S&P 500, the real estate and utilities segments outperformed, aided by a decline in long-term bond yields, which make their relatively high dividend payments more attractive in comparison. Industrials performed worst due to the trade worries, dragged lower in particular by leading exporters Boeing and Caterpillar.

On Tuesday, stocks opened sharply lower after President Trump directed his administration to draw up a list of tariffs on another $200 billion of Chinese goods, and a Chinese Commerce Ministry official warned that the country would respond in kind. On Thursday, stocks slumped again after German automaker Daimler (maker of Mercedes) lowered its outlook, citing the likelihood of lower sales for SUVs that the company makes in the U.S. and exports to China. After earlier suggesting that it might cut its tariffs on auto imports, China has recently threatened to increase them in response to the latest U.S. trade volleys. On Friday, President Trump further clouded the outlook for Daimler and other European automakers by warning that the U.S. would place 20 percent tariffs on auto imports from the EU if it did not lower its own barriers.

The energy sector was particularly volatile last week, falling through Thursday before rallying on Friday after OPEC ministers meeting in Vienna announced a smaller-than-expected increase in oil production. Consumer discretionary stocks also reacted to some notable developments. Media shares rallied after Disney sweetened its offer for most of the assets of 21st Century Fox, while Amazon and other major online retailers fell following a Supreme Court decision granting states the right to tax online sales by out-of-state firms.

Some disappointing economic data also appeared to be a drag on stocks. Traders pointed in particular to weaker-than-expected building permits and existing home sales, as well as a slowdown in a gauge of regional manufacturing activity. The labor market remained in solid shape, however, with weekly jobless claims hovering near levels last reached in the early 1970s, when the labor market was just over half of its current size. Yields on the benchmark 10-year U.S. Treasury note closed last week roughly unchanged.

In a volatile week for European equities, most of the major indexes closed lower. The pan-European STOXX 600 Index fell by about 2 percent, with most of the losses coming midweek, when automobile, mining, and tech stocks led the index lower. Also losing ground was the exporter-heavy German DAX 30. As in the U.S., escalating trade tensions between the U.S. and Europe were key. Certain U.S. goods, including bourbon, cranberries, and Harley-Davidson motorcycles were among the €2.8 billion ($3.2 billion) worth of products that will now carry tariffs. The move came in response to new U.S. tariffs on European aluminum and steel. Trade tensions weighed on mining and tech stocks, along with auto shares.

In Asia, China’s benchmark stock index ended the week on the verge of a bear market — commonly defined as a drop of at least 20 percent from its high — as trade pressures were the key driver there too. China’s state-run media called U.S. protectionism a “symptom of paranoid delusions” and said that U.S. measures to penalize China would ultimately backfire on U.S. workers. For the week, the benchmark Shanghai Composite Index shed 4.4 percent and the large-cap CSI300 Index fell 3.8 percent, marking the worst week for both gauges since February. Friday’s weekly drop pushed the Shanghai index down 19 percent from its latest high in January. Japanese stocks fell too, if not as precipitously.

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Narrowly Mixed

The major domestic equity indexes ended last week narrowly mixed. A drop on Friday erased gains for the Dow and the S&P MidCap 400, while the tech-heavy Nasdaq and small-cap Russell 2000 indexes were able to remain in positive territory. The S&P 500 was virtually unchanged. The Nasdaq, S&P MidCap 400, and Russell 2000 all managed to set new record highs during the week before falling back Friday. Within the S&P 500, consumer discretionary and utilities stocks performed best, while energy, financials, materials, and industrials shares recorded steep losses.

Stock prices fluctuated within a small band for most of the week — a notable contrast to the volatility of recent months — as traders seemed largely unmoved by a series of important macroeconomic events and data. In particular, the summit between North Korea and the U.S., which resulted in a televised signing ceremony on Monday, seemed to have little impact on markets, perhaps because the details of North Korea’s promised denuclearization remain unknown or undetermined.

Stocks had a larger reaction to the Federal Reserve’s policy meeting on Wednesday. Fed officials decided to raise the federal funds rate by another 25bp, as expected, but stocks fell after policymakers offered a slightly more hawkish outlook. According to the Fed’s “dot-plot” survey of individual policymaker’s rate expectations, one more official now expects a total of four rate hikes in 2018, rather than three. Disquiet over the prospect of a faster pace of rate hikes in the U.S. may have been offset by a somewhat more dovish tone from the European Central Bank during the week. The Fed’s change in tone had more of an impact on emerging markets.

The week’s economic data was generally positive, which may have assuaged rate concerns. On Tuesday, the Labor Department reported that headline inflation in May had reached 2.8 percent on a year-over-year basis, its highest level since 2011. The rise in oil prices deserved much of the blame, however, and core inflation (less food and energy costs) remained roughly in line with the Fed’s target. Retail sales data delivered more of an upside surprise. Core retail sales (excluding sales at automotive dealers, building materials stores, and gas stations) rose 0.6 percent in May, while previous months were revised higher. Spending increases have been running ahead of income gains in recent months, causing a pickup in the use of credit and a decline in the savings rate.

Traders had a bigger reaction to international trade news on Friday. The Trump administration announced that it was following through with an earlier threat to impose tariffs on imports of $50 billion worth of goods from China, which came on the top of earlier announced steel and aluminum tariffs. China quickly promised to respond with its own tariffs on a similar scale, which seemed to take a large toll on materials and industrials shares. Notably, the producer price index rose 0.5 percent in May as large jumps in prices for steel and aluminum impacted the reading. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent threshold following the Fed meeting but ended slightly lower for the week.

Most European markets closed last week higher, boosted early in the week by bank, mining, and energy shares. Volumes were generally muted as traders apparently awaited news from the planned ECB meeting. The pan-European STOXX 600 finished nearly 2 percent higher, logging its biggest daily gain since last April, according to FactSet data, aided in part by a tumbling euro. By the end of the week, most key indexes lost ground as investors’ concerns about the escalating trade dispute between the U.S. and China intensified. The UK blue chip FTSE index ended the week flat.

In Asia, large-cap Japanese stocks posted gains, but small-caps edged lower. In China, the benchmark stock index ended last week at a its lowest level since September 2016, as traders fretted that the widening trade rift with the U.S. would weigh on the country’s growth. For the week, the benchmark Shanghai Composite Index shed 1.5 percent, its fourth weekly decline, while the large-cap CSI300 Index declined 0.7 percent. The declines in China came hours before the Trump administration announced that it approved tariffs on Chinese goods worth about $50 billion. Additionally, the U.S. has nearly completed a second list of tariffs on $100 billion in Chinese goods, Reuters reported on Friday.

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A Good Week

Domestic stocks recorded solid gains last week, with the Nasdaq and S&P MidCap 400 indexes reaching new peaks and the S&P 500 hitting its best level since early March. Despite setting a record – snapping its longest streak without a fresh high since 2016 – the tech-heavy Nasdaq lagged the other benchmarks due to declines late in the week. On a sector basis, consumer discretionary shares performed best within the S&P 500, while utilities stocks suffered substantial losses as long-term U.S. Treasury yields rose, making their relatively high dividend payments less attractive in comparison.

Traders suggested that the afterglow from the previous week’s strong employment and manufacturing data seemed to help the market move higher early in the week. Further good news arrived Tuesday, when several surveys indicated better-than-expected expansion in both the manufacturing and services sector. A sharp increase in mortgage applications, reported Wednesday morning, was also encouraging.

A decline in the U.S. dollar also boosted sentiment as a weak greenback boosts the competitive prospects of U.S. exporters and increases the value of profits earned overseas by U.S. companies in dollar terms. The dollar fell in particular against the euro as worries ebbed about Italy’s new government and speculation grew that the European Central Bank might soon announce a change in monetary policy.

The week’s market advance came despite continuing worries about heightened trade tensions and other international conflicts. Heading into this weekend’s meeting of the Group of Seven industrialized nations, President Trump signaled his intention to continue pursuing an aggressive trade agenda even at the expense of America’s standing in the world. For decades, the G-7 summit has been a venue for the richest countries to coordinate policies around trade and shared values, and the U.S. was the undisputed leader. Now, it appears that the Trump administration seems less interested in maintaining the post-World War II trading system and more concerned with domestic priorities (“America First”).

The immediate focus of the talks — which include Canada, France, Germany, Italy, Japan, the U.K. and the U.S. — will be the Trump administration’s decision to impose tariffs on steel and aluminum imports from fellow G-7 countries. Even before the meetings, the White House said that President Trump would leave the summit much earlier than planned, as the general dispute got hot quickly on Thursday over the U.S.’s trade stance between Mr. Trump and two of America’s closest allies: Canada and France. A relatively cordial start to the summit may have lifted sentiment on Friday afternoon, however. Uncertainty surrounding the June 12 summit between the U.S. and North Korea in Singapore may have also worried some.

Meanwhile, China hawks in Congress and in the administration lost a battle over ZTE when, despite lots of tough talk on China, the Trump administration announced a surprisingly soft deal Thursday to resuscitate the Chinese telecommunications giant, which many see as a major security threat, but they made it clear their war against Chinese tech companies is far from over. As noted above, U.S. Treasury yields ended modestly higher for the week after peaking Wednesday afternoon.

European equities finished last week lower as trade tensions once again rattled financial markets there on the eve of the G-7 summit. Following President Trump’s tweet that accused Canada and the European Union of having unfair trade barriers, most European equities headed lower. The German DAX, which holds several export-dependent companies, posted a loss of more than 1 percent by week’s close. The pan-European STOXX 600 Index and the UK’s blue-chip FTSE 100 Index each logged a decline of around 0.8 percent for the week. European traders remained worried about whether the U.S. would continue to levy tariffs on imported European steel and aluminum.

In Asia, Japanese stocks rallied, with the Nikkei 225 Stock Average advancing more than 2 percent for the week. China’s benchmark stock index fell for a third consecutive week as U.S. trade concerns and Beijing’s nationwide deleveraging campaign targeting debt-laden companies weighed on sentiment. For the week, the benchmark Shanghai Composite shed 0.3 percent. Friday marked the end of the first week of trading for the roughly 200 Chinese companies that joined MSCI’s global equity benchmarks on June 1. The addition of Chinese A shares to MSCI’s indexes — including its flagship Emerging Markets Index — was expected to attract large capital inflows into China, but the performance of Chinese stocks has proved disappointing this year. Through Friday’s close, the Shanghai Composite has fallen 7.2 percent YTD, while the CSI300 has shed 6.2 percent, according to Dow Jones.

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There and Back in the Same Week

Domestic stocks finished last week modestly higher after quickly recovering from a post-Memorial Day sell-off amid worries about Italian politics and the stability of the eurozone. The small-cap Russell 2000 outperformed the broader market, reaching record highs, as did the tech-heavy Nasdaq. On the negative side, the blue chip Dow declined. Tech shares performed well, while financial stocks struggled as a sharp decrease in longer-term Treasury yields led to worries about bank profitability.

Traders attributed last week’s market action to a wide range of factors, from European politics to trade worries as the U.S. imposed tariffs on steel and aluminum from the European Union, Canada, and Mexico and thus faces retaliation for doing so. Continued volatility in oil prices and month-end positioning activity also played roles. Despite these factors, the S&P 500 remains largely range-bound and has remained in a narrow range since May 9. The “on again” nature of the summit with North Korea happened late on Friday and didn’t make an impact.

The price of West Texas Intermediate oil, the U.S. crude benchmark, continued to decline following OPEC’s pre-Memorial Day decision to increase its output and finished the week below $66 per barrel. News reports about strife among OPEC members contributed to further price declines. Oil prices did not fall steadily, however, as a sharp midweek rally pared earlier losses.

The monthly jobs report was issued on Friday and it was a very good one. The unemployment rate fell to an 18-year low, employers added jobs at a faster pace, and wages modestly improved. The unemployment rate ticked down to a seasonally adjusted 3.8 percent in May, matching April 2000 as the lowest reading since 1969. Non-farm payrolls rose a seasonally adjusted 223,000 in May, a jump in gains from March and April. Average hourly earnings ticked up to a 2.7 percent from a year earlier – and raises were even stronger for nonmanagers.

U.S. employers have now added to payrolls for 92 straight months (almost eight years), extending the longest continuous jobs expansion on record. Those gains are extending to all corners of the labor market. The unemployment rate for women, 3.6 percent in May, was the lowest since 1953, when a far smaller share of women sought jobs. The jobless rates for blacks, Latinos and those without high-school diplomas are all trending near record lows.

Last week, bonds traded much like stocks, but in the opposite direction. On Tuesday, demand for safe-haven securities amid political turmoil in Italy triggered a rally in U.S. Treasury paper, driving the benchmark 10-year U.S. Treasury note’s yield to its largest one-day decrease since the Brexit vote in June 2016. However, yields increased later in the week to close only modestly below where they started.

In Europe, the news focus was that Italy’s populist Five Star Movement and far-right League party formed a coalition government, naming an academic and political novice, Giuseppe Conte, as prime minister. It was a week characterized by uncertainty amid political deal-making and calls for impeaching Italian President Sergio Mattarella by coalition members angry that their plans for a nascent government were being blocked. Investors fled Italian stocks, and bond spreads widened as a result, with much of the concern centered on whether Italy, one of the eurozone’s largest economies, would abandon the euro and how the country would handle its vast public debt (third highest in the world, behind the U.S. and Japan). Traders also seemed to be concerned that populist sentiment elsewhere in the eurozone, strengthened by the events in Italy, could threaten the long-term survival of the currency bloc. European stocks generally traded off, as well.

In Asia, stocks generally weakened on account of global risk aversion. In China, the “risk off” tendency overcame the perceived benefits of the long-awaited inclusion of Chinese A shares into MSCI’s global equity benchmarks. For the week, the benchmark Shanghai Composite Index and the large-cap CSI300 Index dropped 2.1 and 1.2 percent, respectively. The declines in Chinese stock markets continued into Friday, when 234 Chinese companies officially joined MSCI’s global equity benchmarks, including its flagship Emerging Markets Index.

Mostly Quiet, A Bit Higher

The major domestic stock market indexes were flat to slightly higher in light trading ahead of the Memorial Day weekend last week. The small-cap Russell 2000 Index lagged, reversing a recent stretch of outperformance that brought the benchmark to record highs. Energy shares performed worst within the S&P 500 Index, while utilities stocks recorded solid gains as longer-term bond yields fell, making their relatively high dividend yields more attractive in comparison.

The week was perhaps most notable for the plunge in oil prices and energy shares. On Monday, oil prices reached their highest level since late 2014 on speculation that the U.S. would impose new sanctions on Venezuela after the country’s leadership solidified its control in elections over the weekend widely regarded as corrpupt. Venezuela has the largest proven oil reserves in the world, although its production has been constrained by the country’s economic collapse.

Oil prices reversed course abruptly on Tuesday afternoon, however, following reports that OPEC was planning to increase production as early as June in order to prevent further price increases from destroying demand. Ironically, the threat of U.S. sanctions appeared to be partly at work in this case as well, with some speculating that OPEC was seeking to compensate for the loss of Iranian and Venezuelan supply. Supply fears gained further traction on Friday, when Russian Energy Minister Alexander Novak stated that “the moment is coming” to end a deal among major exporters to cut back on production that had been in place since the start of 2017. By the close of trading on Friday, the price of a barrel of domestic West Texas Intermediate oil had declined by nearly 7 percent from its Tuesday morning high.

Last week saw a number of other major geopolitical developments, but most seemed to have had only a temporary impact on the broader market. Treasury Secretary Steven Mnuchin provided a boost to sentiment to start the week by remarking that the trade war with China was “on hold” after progress in talks over the weekend. On Tuesday, stocks got another brief lift after China announced a reduction in tariffs on auto imports, but trade sentiment turned sour again on Wednesday after the Commerce Department announced that it was investigating whether auto imports were posing a threat to the U.S. industry.
President Trump’s decision to cancel the upcoming summit with North Korea sent stocks sharply lower in early trading Thursday, although the market later regained its footing. Worries over the fiscal policies of the incoming Italian government and the worsening debt problems in Turkey also periodically appeared to weigh on sentiment.

Conversely, stocks appeared to get a brief lift from the release Wednesday afternoon of the minutes from the Federal Reserve’s policy meeting early in the month. Policymakers emphasized the “symmetric objective” of their 2 percent inflation target, suggesting that a slightly higher rate of inflation would be acceptable. Traders also seemed to be encouraged that Fed officials appeared uncertain about how tight the link had become between a tightening labor market and higher inflation — a crucial question for Fed policy with the unemployment rate now at a nearly 18-year low of 3.9 percent. This dovish tone to the Fed minutes and growing demand for perceived “safe-haven” assets amid geopolitical uncertainty helped push longer-term U.S. Treasury yields substantially lower for the week.

Geopolitical uncertainty and soft economic data led to European stock market volatility during the week, as traders wrestled with the ever-changing developments regarding a possible summit between the U.S. and North Korea, as well as growing concerns about political issues in Italy, Spain, and the UK. The pan-European STOXX 600 Index posted a weekly loss, breaking its longest string of gains since mid-2014. The index had a notable late-week dip after President Trump called off the planned summit with North Korea’s Kim Jong-un. Stocks recovered somewhat after a measured response from Kim Jong-un that may have mollified some skittish investors.

The threat of new tariffs on U.S. auto imports further depressed markets during the week. Shares of European companies that make some of the top-selling cars in the U.S. tumbled on the news, and the STOXX Europe 600 Automobiles & Parts Index lost nearly 2 percent. Germany’s export-heavy DAX 30 also retreated for the week.

In Asia, China’s benchmark stock indexes posted their biggest weekly drops in a month, capping a week marked by geopolitical volatility after President Trump pulled out of the summit with North Korea and Sino-U.S. trade tensions remained on low boil. By Friday’s close in Shanghai, the blue chip CSI300 Index and the Shanghai Composite Index had given up 2.2 and 1.6 percent, respectively, marking the worst weekly decline for each since late April. Japanese stocks also traded off for the week. On Friday, China’s official news agency stated that U.S. Commerce Secretary Wilbur Ross will visit China in early June for more trade talks. News of Ross’s visit comes as the U.S. and China continued to exchange threats and concessions about trade.

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Mostly Quiet, Mixed

The major domestic equity benchmarks were mixed but mostly down last week amid generally subdued trading volumes. Energy and materials stocks performed best, while real estate and utilities shares sold off as their relatively high dividend payments became less attractive following an increase in longer-term bond yields. Small- and mid-caps handily outperformed large-caps. The Russell 2000 ended the week with three straight record highs.

Stocks suffered much of their decline on Tuesday morning, after strong economic data raised fears about higher interest rates. Traders generally shunned riskier assets, turning away from growth stocks in favor of lower-priced value shares and selling off emerging markets assets. The Commerce Department reported that core (excluding auto, gas, and building materials) retail sales expanded by 0.3 percent in April. The figure was a bit below consensus estimates, but the government also revised February and March sales substantially higher. Current labor market trends are pushing up wage income at an annualized rate of about 4.5 percent, which should be sufficient to support a similar rate of nominal (i.e., unadjusted for inflation) spending growth over time.

Much of the rest of the week’s economic data were also positive. Two indexes of regional manufacturing activity came in much stronger than expected, and the Federal Reserve reported that overall industrial production grew more than anticipated in April. Housing sector data were mixed. A gauge of builder sentiment rose, but starts of new homes slowed down more than expected in April, largely due to a drop-off in multifamily construction. The solid economic data pushed the yield on the benchmark 10-year U.S. Treasury note up to 3.12 percent on Thursday, its highest level in seven years. The yield on the 30-year U.S. Treasury bond hit its highest level since June 2015.

Trade talks between the U.S. and China in Washington remained in focus throughout the week, with little clarity on the status of the negotiations. On Thursday, several news outlets reported that China had made an offer to cut its trade surplus with the U.S. by $200 billion, but a Chinese official on Friday denied that such an offer had been made. Separately, President Donald Trump said Thursday that Beijing had become too “spoiled” and he had lowered his expectations for negotiations. Geopolitical tension in the Korean Peninsula and throughout the Middle East remain constant sources of concern.

European equities were relatively volatile but ended last week higher. The pan-European STOXX 600 index reached its highest level since late January before settling a bit lower late in the week. The UK’s blue chip FTSE 100 also climbed to a record close, lifted by a report midweek that purportedly confirmed that Britain would retain some official trade ties with the European Union following Brexit. Germany’s export-heavy DAX 30 and France’s CAC 40 also closed higher. A rally in oil prices helped energy shares outperform and mining stocks were notably strong. Telecommunication services and banks lagged.

In Asia, Chinese stocks closed mixed last week after a trio of economic indicators there painted a mixed picture for China’s economy, suggesting that growth on the mainland may be entering a long-anticipated slowdown just as trade protectionism threatens to heat up. Japanese stocks advanced last week as the Nikkei 225 recorded its eighth positive week in a row and returned to positive territory for the year. The yen, which lost ground against the U.S. dollar as U.S. bond yields rose, on Friday traded at its lowest level since January. Emerging markets stocks in both Europe and Asia struggled.

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An Excellent Friday, A Mixed Week

Domestic stocks recorded solid gains last week, helping push all of the major benchmarks back into positive territory YTD. The S&P 500 notched its best weekly advance in two months and, on Thursday, closed above its 100-day moving average for the first time since mid-March. Financials shares were particularly strong, seemingly helped by an increase in longer-term bond yields early in the week, which offer the prospect for higher bank lending margins. Conversely, the rise in bond yields weighed on utilities shares, whose relatively high dividends became less appealing in comparison. A decrease in yields late in the week helped utilities stocks recover some ground but did not appear to derail the momentum in the financials sector.

U.S. companies are buying back their shares at a record pace, providing fresh support during what has been a rocky stretch for the stock market and many have rushed for the exits. S&P 500 companies have collectively bought $158 billion of their own stock in the first quarter, according to S&P Dow Jones Indices. That is on pace to be biggest amount in any quarter, based on data stretching back to 1998. The buybacks have been fueled in part by the new tax law that is freeing up cash and encouraging companies to bring back money held abroad. The companies that have rolled out some of the biggest buybacks are Apple, Microsoft and JPMorgan Chase, among others.

After drifting sideways early in the week, the major domestic stock indexes began moving higher on Wednesday, although traders noted that a broad catalyst for the gains seemed conspicuously absent. Rather, small bits of good news in individual sectors seemed to drive the market higher, while the final trickle of first-quarter earnings reports continued to surprise mainly to the upside. By the end of the week, data and analytics firm FactSet was anticipating that overall earnings for the S&P 500 had grown by 24.9 percent in the quarter over the year before, with nearly four out of five companies beating analysts’ earnings and revenue estimates.

A rise in domestic crude prices provided a particular boost to the energy sector. The price of a barrel of West Texas Intermediate crude hovered above $70 for much of the week, the first time it had crossed that barrier since late 2014. Saudi Arabian officials were reportedly prepared to guide international oil prices to $80 per barrel, and the potential disruption to Iranian supplies also pushed prices higher. On Tuesday, President Trump announced his intention to withdraw from the Iranian nuclear deal and re-impose sanctions on the oil-rich country, but the action was widely anticipated and did not result in a wide swing in oil prices. Having been the second-weakest segment in the S&P 500 in 2017, energy shares closed the week among the index’s best performers YTD, trailing only tech stocks.

The rise in oil prices threatened to drive gasoline costs higher for the upcoming summer driving season, but the week also brought data showing that overall consumer price inflation remained subdued. Traders appeared to react favorably late in the week to news that core (excluding food and energy) consumer prices had increased only 0.1 percent in April. In particular, the news seems to have encouraged speculation that the Federal Reserve will raise rates in only two more quarter-point increments this year versus the three that many analysts had thought was increasingly likely. The yield on the benchmark 10-year U.S. Treasury note briefly broke through the 3 percent barrier for the first time since late April but ended only modestly higher for the week, at 2.97 percent.

Key European equity indexes also ended last week higher — buoyed by rising oil prices and positive corporate news — despite political uncertainty, particularly in Italy. Trading volumes were low, and reduced volatility reflected a relatively calm market. The pan-European STOXX 600 Index ended the week up about 1.6 percent, marking its seventh straight week of advances. As the first-quarter corporate earnings season also wound down there, more European companies than usual continued to surpass earnings estimates.

European traders seem to have become less likely to bid shares up or down in tandem of late. Rather, companies that beat earnings estimates have been rewarded, while those missing estimates have seen sharp declines. The weakening U.S. dollar penalized growth in the Eurozone overall.

In Asia, trade tensions between the U.S. and China remained in the news as both sides entered a second round of trade talks in Washington to try and head off a damaging trade war. The latest bilateral trade negotiations occur as the Trump administration is reportedly finalizing a list of Chinese products that it has targeted for punitive tariffs. Consistent with the U.S. and Europe, Chinese and Japanese stocks advanced for the week.

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An Excellent Friday, A Mixed Week

A strong Friday – following the monthly jobs report – allowed the major domestic equity benchmarks to close mixed for the week. The tech-heavy Nasdaq performed best, helped in particular by a rally in heavily weighted Apple. Tech stocks also outperformed within the S&P 500, while health care shares lagged, due to some poor earnings results and worries that the Trump administration might announce measures to regulate drug prices.

Trade fears seemed largely responsible for the market’s slow start to the week. Traders seemed worried about the upcoming deadline for the extension of waivers on U.S. aluminum and steel tariffs, as well as the outcome of a planned two-day visit of a U.S. trade delegation to China. These worries seemed to diminish at midweek, as the Trump administration extended the tariff negotiation deadline and Treasury Secretary Steven Mnuchin, who was leading the trade delegation, said that the two sides were having “very good conversations.” On Friday, however, The Wall Street Journal reported that the talks had ended without a joint statement or significant progress and that Mnuchin and others had not met with President Xi Jinping as planned. Bloomberg also reported during the week that China had completely cut off purchases of U.S. soybeans, one of the politically sensitive targets it had announced in retaliation for tariffs on its own products.

The strong economic and earnings environment seemed to compensate for the turbulent geopolitical backdrop. Shares of Apple jumped in after-hours trading on Tuesday after the tech giant beat first-quarter earnings expectations. The stock built on its gains on Friday on news that Warren Buffett’s Berkshire Hathaway had increased its position in the company. On the economic front, Friday’s monthly employment summary from the Labor Department showed that payrolls increased at a healthy pace in April, while the unemployment rate had declined to 3.9 percent, its lowest level since 2000. Strong job gains in construction and capital goods manufacturing, in particular, bode well for housing and for business capital spending.

The Federal Reserve’s policymaking committee met last week and kept official short-term rates unchanged, as expected. In the announcement accompanying their decision, policymakers emphasized their “symmetric objective” when it comes to inflation, suggesting they will allow inflation to run above their 2 percent target for a period. Nevertheless, most analysts believe the Fed will continue raising rates until the unemployment rate stabilizes, potentially shifting the stance of monetary policy from accommodation to restraint. The monthly labor report showed that hourly wages rose only moderately in April, which may have eased inflation fears and fueled part of Friday’s strong rally.

Longer-term bond yields remained roughly stable for the week, although the yield on the benchmark 10-year U.S. Treasury note approached 3 percent again on Wednesday after having crossed the symbolic threshold the previous week.

Key European equity indexes closed higher for the holiday-shortened week there, aided by positive corporate earnings reports, a strong U.S. jobs data report, and a weaker euro, which aids companies that export goods. Traders largely ignored some weak economic data, including disappointing retail sales metrics. The pan-European STOXX 600 Index logged a 0.6 percent gain last week, with mining and tech stocks posting notable gains.

In a two-day, holiday-truncated trading week there, Japanese stocks advanced on Tuesday and gave back their gains on Wednesday. While the Nikkei 225 Stock Average advanced for a sixth consecutive week, the gain was minimal. The broader market yardsticks declined modestly for the week. All the major Japanese stock market indexes are under water in 2018. In China, stocks moved modestly lower as a trio of economic indicators showed that China’s manufacturing and services sectors stayed resilient in April despite U.S. trade tensions, though an export slowdown signaled possible trouble ahead for a key growth engine.

As noted above, a U.S. delegation led by Treasury Secretary Steven Mnuchin arrived in China Thursday with a list of requests for President Xi Jinping, but the Chinese leader’s economic strategy and domestic constituencies make any compromise difficult. Xi may be China’s most powerful leader in decades, but he faces a test of that strength as he tries to avert a trade war with the U.S. The Trump administration is considering restricting some Chinese companies’ ability to sell telecom equipment in the U.S., which would escalate a growing feud. The Pentagon is moving to halt the sale of Chinese phones in retail outlets on U.S. military bases around the world, citing potential security threats.

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Mostly Flat

The major domestic equity benchmarks were mostly flat last week as traders reacted to the heaviest flow of earnings reports of the season. Of the companies in the S&P 500, 168 companies representing 42 percent of its market capitalization reported first-quarter earnings last week. The utilities and real estate sectors outperformed, while industrials performed worst. Stocks suffered most of their declines for the week on Tuesday, driven in part by a plunge in Caterpillar shares after officials at the industrial equipment giant cautioned that profits may have reached a “high-water mark for the year.” 3M also fell sharply on a lower profit outlook. The two stocks’ declines weighed particularly heavily on the narrowly focused Dow given their heavy weighting in that index. Traders seemed to be concerned that higher input costs, the tight labor market, and more aggressive plant and equipment investment might also be resulting in peak profit margins.

Despite fears about future profit momentum, the strong current earnings environment provided support to the market during the week. Thursday brought the week’s best daily performance after Facebook shares recouped some of their recent losses and soared over 9 percent following the release of revenues and profits that easily beat estimates. Fellow internet giant Amazon gained nearly 4 percent following its earnings beat. By the end of the week, analysts polled by data and analytics firm FactSet were expecting first-quarter earnings for the S&P 500 as a whole to have expanded by over 23 percent on a year-over-year basis. Analysts at Thomson Reuters were even more bullish, anticipating that earnings would grow by nearly 25 percent, led by energy and tech firms.

Having reached new multiyear highs at midweek (the benchmark 10-year U.S. Treasury note’s exceeded 3 percent), longer-term U.S. Treasury yields fell back on Thursday and Friday and ended the week roughly unchanged. Traders pointed to signs of inflation as one factor behind the yield gain, particularly rising prices for commodities, including oil, and trade tensions with China. Inflation threatens the value of bonds by eroding the purchasing power of their fixed payments. That could spur the Federal Reserve to raise interest rates. Indeed, traders are increasingly betting that the Fed is preparing to raise rates four times this year, more than the three that officials initially penciled in at recent meetings.

European stocks broadly gained as investors digested a flood of corporate earnings and welcomed a seemingly dovish monetary policy statement from the European Central Bank. In the eurozone, Germany’s exporter-heavy DAX 30 lagged the broad European region, while France’s CAC 40 outperformed. French President Emmanuel Macron visited Washington, D.C., where he displayed a friendly relationship with U.S. President Donald Trump but criticized protectionist trade policies in an address to a joint session of Congress. German Chancellor Angela Merkel met with President Trump on Friday in Washington, where the two also discussed trade policy.

After the release of about one-third of quarterly European corporate earnings reports, the market seemed to be interpreting the results positively, although there was substantial dispersion of results within sectors. Traders appeared more willing to shrug off disappointing results from individual companies as sentiment improved toward the end of the week.

In Asia, trade relations between the U.S. and China remained at a low boil as officials from both sides worked behind the scenes to resolve their respective tariff threats. Nevertheless, the threat of an all-out trade war still loomed in the background at the International Monetary Fund’s annual spring meeting in Washington, D.C., where the U.S.-China trade spat was cited as a risk to global economic growth. Elsewhere in the east, Japanese stocks rallied for a fifth consecutive week.

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Good Again

Domestic stocks rose for the second consecutive week as first-quarter earnings reporting season began in earnest. The energy sector posted strong returns for another week, boosted by the continuing rally in crude oil prices. The price of a barrel of West Texas Intermediate crude, the U.S. benchmark, approached $70 midweek before moderating. However, consumer staples companies lagged, dragged lower by a steep drop in Philip Morris shares. The tobacco company reported that its cigarette shipments declined more than expected and that its e-cigarettes gained less market share in Japan – a key market – than anticipated, weighing on other tobacco stocks.

Last week began with something of a relief rally, as traders appeared to be heartened that the previous Friday’s air strike on Syria, conducted by the U.S., France, and the U.K., was limited and did not provoke a response from Russia. The economic outlook also helped drive sentiment during the week. Stocks turned lower in late trading on Wednesday on remarks from St. Louis Federal Reserve President James Bullard. In an interview with CNN, Bullard stated that he was “getting concerned about the flattening yield curve,” and he noted that an “inverted yield curve [in which short-term rates are higher than long-term yields] is a powerful predictor of economic downturns.” Traders appeared to be encouraged by data showing that retail sales had increased in March, breaking a three-month streak of declines. Housing starts also rose, and a regional gauge of manufacturing activity indicated healthy expansion.

For much of last week, however, traders seemed to turn away from the economic and political backdrop and focus on corporate earnings. The week brought earnings reports from 69 of the constituents of the S&P 500 Index, along with several hundred reports from smaller firms. According to data and analytics firm FactSet, 80 percent of the S&P 500 companies that have reported quarterly earnings to date have posted earnings per share results that topped consensus estimates.

The U.S. Treasury yield curve steepened toward the end of the week, reversing course after a recent flattening trend, as longer-term U.S. Treasury bonds experienced selling pressure. The strong retail sales and housing starts data, combined with higher oil prices, likely contributed to fears of inflation. On Friday, the benchmark 10-year U.S. Treasury note traded to a 2.94 percent yield, which was near the top of its recent range.

European equities ended last week mostly and modestly higher, although emerging markets were lower, as traders waded through a wave of corporate earnings reports and economic data there too. Markets were helped by an easing of geopolitical tensions as well as some renewed optimism about global trade after positive comments by U.S. officials on NAFTA and China. Midweek, mining and basic resource stocks were notable outperformers. Financial stocks were also strong, but consumer goods and oil & gas companies were marked underperformers by the end of the week.

The pan-European STOXX 600 index logged another advance and climbed to a seven-week high on Thursday before sliding lower. Germany’s export-heavy DAX 30 index and France’s CAC 40 index also ended the week higher, rising on Tuesday to their highest closes since early February.

In Asia, Japanese stocks rallied, largely due to trade talks between Japan and China for the first time in eight years. In China, stocks traded lower even though its economy grew faster than expected in the first three months of 2018 as consumer demand stayed strong and manufacturing rebounded.

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