SUMMARY
Signals appeared throughout much of last week suggesting a gradually slowing US economy…..until the May jobs report showed up on Friday, which massively missed expectations in terms of new jobs added (272,000 vs 180,000 expected). Wage inflation was also higher than expected, even as unemployment increased to 4.0%, a level last breached 27 months ago (Jan 2022).
In Europe on Thursday, the ECB did what they had been signalling for weeks – the bank lowered overnight bank policy rates in the Eurozone by 25bps. This follows a similar reduction by the Bank of Canada the day before, the first of two G7 banks to lower their policy rates.
Week-over-week, most global equity markets chalked up further gains. UST bonds were also a touch better (meaning yields were a touch lower) in spite of yields spiking following the release of Friday’s jobs report. In fact, Friday was not a particularly good session in the US overall because of the unexpected stronger-than-expected May jobs report which rattled stock and bond markets. Friday’s jobs report also sent gold lower and the US Dollar higher.
I sent emails to subscribers last week regarding GameStop (GME) / “roaring kitty”, the OPEC+ decision regarding quotas (market non-event), and the Saudi Aramco secondary stock offering (a false market so good thing Saudi investors mopped the offering up), and you can find that email here. I also wrote an update on the growing US deficit / debt here.
WHAT MATTERED LAST WEEK
US economy
The US economy served up mixed news most of last week, certainly easing the minds of Fed officials in their quest to snuff out inflation. And then the May jobs report was released Friday morning, showing that the US economy added more jobs than expected (272,000 jobs added, 180,000 expected) and that wages increased 0.4% in April (vs May), or 4.1% YoY. The unemployment rate did tick up to 4.0%, but this seemed to be of little solace to investors who once again pushed out their bets as far as timing for Fed interest rate cuts. There are probably more nuances in the figures, but the bottom line following the robust labour market report is that yields moved higher, the US Dollar strengthened and US equities were mixed (stocks always seem to be the question mark as far as their reaction to weak economic data). The Job Openings and Labor Turnover Survey (JOLTS) for April released last Tuesday, and weekly first time jobless claims released on Thursday morning, certainly did not appropriately set the stage for the surprise May jobs report. The fact is that the US jobs market remains on fire, troubling for persistent inflation.
Away from jobs, the US economy continues to deliver expansionary data for services (see ISM services PMI released Wednesday), and contractionary signals for manufacturing (see ISM manufacturing PMI data released Monday. Manufacturing PMI for May was lower than April, and below consensus expectations.
Mix all this together, and the CME FedWatch Tool is now anticipating the first and only Fed rate cut in 2024 will occur in September.
ECB rate decision
The ECB delivered exactly what it had been advertising for weeks now, which was a 25bps reduction in its overnight bank policy rates (ECB press release here). Ms Lagarde and other ECB officials were non-committal with respect to timing of the next potential cut, simply because inflation seems stuck above 2% at the moment in the common currency bloc (May flash core CPI +2.9% YoY). There are also signs that the Eurozone economy – although not exactly on fire – is starting to improve off of its low base, especially in the common currency bloc’s largest economy Germany. Eurozone economic data released on Friday (GDP and employment data) was in line with consensus. The ECB became the second G7 bank to lower its bank policy rates, following the Bank of Canada, which lowered its overnight bank policy rates the day before.
MARKETS LAST WEEK
I am trying a new format for the tables, which hopefully are less cluttered and more helpful to my readers. These take a lot of time each week (no matter the format), so I am contemplating whether or not to continue to produce them at all. Feedback would be welcome from readers.
Last week was mixed as far as global equity markets, albeit generally positive. Chinese equities continue to lag (weakest performing index YtD of the ones tracked by EMC) and the rally to a record level in the FTSE 100 has stalled. US, European and emerging market equities powered forward. Japanese equities also eked out gains. Although Japanese equities are the best performing index YtD tracked by EMC, it is also the only equity market that is down (4.2%) in the second quarter.
US stocks continued to progress, with only the value-oriented Russell 2000 losing ground this week. The Russell 2000 was really hammered on Friday following the jobs report.
US Treasury bond yields were lower across the curve last week, although Friday’s surprisingly strong jobs report pushed yields sharply higher. Even so, the total returns on intermediate and longer-term bonds managed to extend gains for the week, and are in positive territory now for the last month (although negative YtD).
Corporate bond spreads were little changed on the week, with yields following the bond market higher, and credit spreads a touch wider in USD corporate bonds, both IG and HY.
Gold got hammered on Friday following the strong jobs report, closing lower WoW. Crude oil was also sharply lower (in spite of OPEC+ extending supply reductions, as if it matters that much), and the US Dollar strengthened, with its gains coming following the jobs report on Friday. Bitcoin surged above $70,000 on Friday, but fell back to close the week off its intraday-highs, although still registering a sloid gain for the week.
WHAT MATTERS AHEAD
Focus this coming week will include inflation data and the always-watched FOMC policy meeting / decision, which is likely to be a non-event.
Japan GDP to be released Monday, expectation -0.5% QoQ, -1.9% YoY
CPI for China and the US will be released on Wednesday, PPI for the US will be released on Thursday
Michigan survey consumer confidence will be released on Friday
FOMC meeting mid-week, decision Wednesday (June 11); also, new set of economic projections will be provided. No change in monetary policy is expected.
MY TRADES LAST WEEK
I did a few bolt-on buys last week, and also reduced my position in underperforming SBUX shares.
SBUX (reduce position): Starbucks is a long-term holding of mine, and one that has performed extremely well. Their most recent results were not good though, and the outlook was not very positive, causing the shares to get hammered. Investors and analysts seem mixed on the company’s prospects. On one hand, Starbucks is ubiquitous, and I like their brand and global presence. On the other hand, the price-quality relationship in their drinks has been adversely affected by inflation, with the value proposition coming more into question in consumers’ minds. I also think the quality of some of their stores has deteriorated, at least in London, with niche players often offering better coffee at similar prices, and a “fresher” ambience. I’m not entirely sure where this company might be heading, so I reduced my position, but chose not to fully exit yet; I would like to see another quarter of results.
Scrap adds: I added scraps to core positions in NVO, V and CRWD (great earnings report from the latter, added to SPX on Friday). I also took some pain by buying back a $190 June 21 covered call on AAPL, although I still have residual exposure on the remaining portion of this trade, originally set up as a cash-neutral hedge.
New position: I added a new position this week: ASML. I have watched NVDA soar with such agony (given my past long positions that I cut), and I wanted to add a stock involved in the semi-conductor sector even at these inflated levels. ASML is further down the value chain, and potentially less exposed to what will eventually bring NVDA down to Earth – competition from competitors that are licking their chops over NVDA’s 78% gross margins. I will build on the position depending on how ASML performs and how the sector “evolves” given the AI narrative.
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