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.