U.S. and International Equities
Markets Mostly Higher
The S&P 500 Index finished this week up more than 20% from its October 2022 closing low, marking the start of a new bull market (based on the most widely accepted definition). Leadership this week came from some of this year’s laggards, including small-caps, cyclicals, as well as the equal-weight S&P 500 Index.
Improving investor sentiment was evident in the latest Investor’s Intelligence report showing the percentage of bulls increased to 51.3% from 23.3%, which is the lowest percentage since early January 2022. Meanwhile, the VIX measure of implied volatility closed below 14 this week for the first time in over three years, either a sign of complacency or rising chances of a soft landing, or both.
Small caps have struggled for much of 2023 amid recession fears, particularly after the bank failures in March; however, these equities have received some traction over the past week as the Russell 2000 Index reached a new three-month high. Small cap valuations, along with last Friday’s strong May payrolls reports, have some investors believing in better prospects for these generally more economically sensitive equities.
Fixed Income Little Changed
The Bloomberg Aggregate Bond Index finished little changed this week as investors anticipate next week’s May inflation reports along with the Federal Reserve (Fed) meeting. Bond investors believe the Fed may be done tightening as inflation eases, but next week will provide additional confirmation with a rate hike in either June or July a roughly 50/50 proposition based on the fed funds futures markets.
Given the recent debt ceiling agreement, the Treasury Department has the ability to issue new debt again and add to the $31.4 trillion in outstanding debt. Currently, and this is subject to change, the Treasury was only set to issue shorter maturity bills this week but is expected to increase issuance significantly in the coming weeks.
The Bloomberg Muni Index posted a positive return for the first time in four weeks, posting a total return of 0.90%. It was the best one-week return since the week ended January 13 (+1.21%). The yield-to-worst for the index fell to 3.69% from 3.85% as of the prior Friday (May 26).
Commodities Mostly Higher
Energy prices finished mixed this week as natural gas prices rallied, though the commodity is still down almost 50% this year. The major metals, gold, silver, and copper finished the week higher.
Economic Weekly Roundup
Europe’s Enters Technical Recession
The latest gross domestic product (GDP) figures for the Eurozone reveal that the region was in a technical recession during the first quarter of 2023. The GDP for the region declined by 0.1% in the first quarter, compared to the fourth quarter of 2022, when GDP also slipped by 0.1%, revised from a previous reading of zero.
German Industrial Output / Labor Landscape
German industrial output rose less than expected in April, clouding the outlook for the Eurozone’s largest economy amid weak new orders data earlier this week.
In addition, Germany is suffering from labor shortages per the nation’s Federal Labor Agency annual analysis. The report showed that 200 out of about 1,200 professions surveyed experienced labor shortages last year, which is up from 148 the previous year. In response, German Chancellor Olaf Scholz’s government is trying to attract more skilled workers from outside the European Union by easing bureaucratic requirements.
China Exports Fell Last Month
Chinese exports declined for the first time in three months in May, adding to risks in the world’s second-largest economy as global demand weakens. The nation reported its exports fell 7.5% from a year earlier in May with imports down 4.5%, adding to signs of a slowing economic recovery that started with the lifting of COVID-19 lockdowns last year.
Initial claims for the latest week came in above economists’ expectation and higher than the prior week but were likely distorted some by the Memorial Day holiday. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, came in below the prior week’s levels and economists’ expectations. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The following economic data is slated for the week ahead:
Monday: Treasury budget (May)
Tuesday: May Consumer Price Index, hourly earnings (May), average workweek (May)
Wednesday: FOMC Meeting, Producer Price Index (May),
Thursday: Weekly initial and continuing unemployment claims, export prices (May), retail sales (May), capacity utilization (May), industrial production (May), manufacturing production (May), business inventories (Apr)
Friday: Michigan sentiment (Jun)
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