The FED backstop came into play this week following Fed Chairman Powell’s comments Wednesday that the FED is prepared to lower interest rates if the economy slows more than expected. The markets saw substantial gains this week in most indices with emerging markets up only slightly. Anticipation of FED rate cuts were supported on Friday by a weaker than expected jobs number. Jobs have been running strong this year up until May and it is too early to say that the May number is the beginning of a trend. We saw a weaker number in February and jobs rebounded the following month. At this point, employers could be postponing hiring until there is a resolution in trade. Since supply chains between the U.S. and Mexico are highly integrated, these tariffs can hurt both countries ability to produce. Still oddsmakers are anticipating as many as three interest rate cuts before the end of the year.
Late Friday, it was announced that an agreement was reached with Mexico on immigration and those tariffs were avoided. These had the potential to hurt economic growth on both sides of the border as supply chains are integrated with components moving back and forth. It remains to be seen how long and how severe the trade war will be with China and it’s effects on the economy, However, we believe the following are reasons to be optimistic:
- Inflation remains below the FED’s target and has been moving lower.
- The FED has expressed a willingness to cut interest rates if needed to support growth.
- Trend employment continues to increase.
- Wages are going up but so is productivity. Therefore, wages are having little impact on inflation and increasing buying power for consumers.
- The household debt service ratio is at 9.9%, lower than anytime going back to 1980 and far below the 13.2% at the end of 2017.
Oil prices recovered some this week despite continued U.S. inventory increases with oil ending at $54.04. Prices rallied on Friday following Saudi Arabia’s comment that OPEC is close to extending production cuts beyond June. A wild card is the uncertainty if the Iranian sanctions will hold as the other parties to the Iran nuclear agreement want to maintain it.
The European Central Bank policymakers met this week. They expect the Eurozone to grow 1.2% this year and 1.4% in 2020 and 2021. Inflation is expected to be 1.3% this year, below the target of 2%. The ECB has started to discuss stimulus options including pushing interest rates further into the negative or resuming bond purchases. They did announce a new targeted longer-term refinancing operation where they would effectively pay banks to lend money.
The 10-year treasury yield ended the week at 2.085%. The dollar fell against a basket of currencies and gold rose to $1345/oz.
In the numbers this week:
- The Institute for Supply Management reported that the manufacturing PMI fell from 52.8 in April to 52.1 in May. Keep in mind that anything over 50 represents expansion.
- The private China Caixin manufacturing PMI remained unchanged at 50.2. However, the official PMI, including state owned entities, fell from 50.1 in April to 49.4 in May representing contraction.
- The IHS Markit’s Eurozone composite PMI increased from 51.5 in April to 51.8 in May showing a slight acceleration in growth.
- The International Monetary Fund raised its U.S. growth outlook from 2.3% to 2.6% but warned that additional tariffs may negatively impact this number.
- The Commerce Department reported
- Factory orders were down 0.8% in April. Excluding transportation, factory orders were up 0.3%.
- Durable goods orders were down 2.1% in April.
- The trade deficit fell 2.1% in April from March. Both imports and exports were down 2.2% but since imports are larger, the deficit fell.
- The Labor Department reported
- First time claims for unemployment rose from a seasonally adjusted 215,000 to 218,000. The four week moving average of claims, designed to smooth out weekly fluctuations, fell to 215,000.
- Productivity growth in the first quarter was revised from a 3.6% annual rate of increase to 3.4%.
- Q1 Unit labor costs fell at a 1.6% annualized rate. Q4 2018 unit labor costs were revised from a 2.5% annual rate of increase to a 0.4% annual rate of decline.
- The U.S. created 75,000 jobs in May. This follows strong gains for the first four months of the year.
- The unemployment rate was unchanged at 3.6% a 50-year low.
- Wages rose at 3.1% in May from a year ago.
- The Energy Information Administration weekly report is here wpsrsummary. Also, the EIA reported in the prior week:
- U.S. Crude oil production rose from 12.3MM barrels per day to 12.4MM barrels per day.
- Storage of natural gas rose 119BN cubic feet and is still below the five year average for this time of year.
- Baker Hughes reported in the past week that the number of active oil rigs fell 11 to 789 and the number of active gas rigs rose 2 to 186. This is the lowest number of oil rigs going back to February 2018.
Please call us if you have any questions.
Loren C. Rex, CFP®, AIF®, MA Erik A Smith
President Managing Partner
Generations Financial Planning & Wealth Management 269-441-4143
77 E. Michigan Ave, Suite 140
Battle Creek, MI 49017
Carrie Fuce, Assistant 269-441-4091
Toll Free: 800-513-8180
Visit our Website: www.genfinplan.com
Registered Representative of and securities offered through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and Generations Financial Planning & Wealth Management are separate companies and are not affiliated.
These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. The Indices mentioned are unmanaged and cannot be invested into directly.