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.