highlights
- Domestic equities finished modestly lower for the week, reversing some of the gains seen in the prior week, when the S&P 500 and NASDAQ broke seven straight weeks of declines.
- Following the release of strong economic data, there was some pushback against a potential Fed rate hike pause in September, which had gained traction in recent weeks.
- Friday’s non-farm payroll report showed payrolls added 390K jobs for May, well above the estimates of 323K. Services added 274,000 jobs which was actually the lowest in over a year.
- Oil posted a nice rally, gaining 3.3% on the week, its sixth straight weekly advance, after OPEC+ decided to boost output by 648K bpd.
- Adding upward pressure on oil prices is China continuing the easing of COVID-19 restrictions, as well as the EU partial ban of Russian oil imports, which was approved on Thursday.
- Corporate commentary leaned negative with Tesla and Coinbase being the latest to announce hiring freezes. The number of news articles mentioning “hiring freeze” has recently jumped to a level not seen since the first few months of the pandemic in 2020.
- In the United Kingdom, Boris Johnson won the key confidence vote after securing the backing of 211 Tory MP’s.
- In Japan, the yen fell to 131.63 per U.S. dollar, the lowest quote since April 2002.
U.S.
Domestic equities finished modestly lower for the week, reversing some of the gains seen in the prior week when the S&P 500 and NASDAQ broke seven straight weeks of declines. The S&P 500 led declines, followed by the NASDAQ and Dow Jones. Growth and value factors performed in line with one another, as the former registered a small relative outperformance, falling 1.17% on the week, versus the S&P 500 pure value index, which dropped 1.94%. Sector performance was mixed with no clear-cut theme, as Energy was the only sector to end in positive territory, (Industrials finished largely flat +.04%).
There was very little to note on the week in terms of sentiment shifting or overall meaningful market moving headlines. The two biggest takeaways were a shift from “good news is bad news”, mainly stemming from the better May payrolls and ISM manufacturing reports, and Corporate commentary from macro-economic headwinds.
Following the release of strong economic data, there was some pushback against a potential Fed rate hike pause in September, which had gained traction in recent weeks.
A number of Fed officials continued to downplay the potential for a September rate hike pause, including Fed Vice Chair Lael Brainard, Cleveland Fed President Loretta Mester, and Fed governor Christopher Waller as the Central Bank continues to try and get inflation under control.
There was also some talk that even if a September “pause” were to occur, this should not be construed as a Fed “put”, as the group would want to potentially take a breath and reassess its policy path after seeing the effects of aggressive rate hikes over the first half of the year. Following various Fed comments and the release of economic data, markets are now pricing in a 2.85% Fed funds rate by the end of December, up about 10bp from a week earlier.
Friday’s non-farm payroll report showed payrolls added 390K jobs for May, well above the estimates of 323K. Services added 274,000 jobs, which was actually the lowest in over a year, primarily because the retail sector shed 61,000 jobs, while the ISM manufacturing headline beat with ease. Though it is worth noting employment in ISM manufacturing fell into contraction territory and posted its lowest reading since November of 2020.
ENERGY PRICES- CRUDE
Oil posted a nice rally, gaining 3.3% on the week, its sixth straight weekly advance, after OPEC+ decided to boost output modestly. The announcement for an output increase was widely anticipated, but did little to assuage concerns over a widening supply deficit.
The cartel agreed to increase production by 648K bpd for July and another 648K bpd for August, which would be a 50% larger increase than the increases seen in recent months when they hiked 432Kbpd. However, even with OPEC+ vowing additional output, it was not enough to slow the continued run in West Texas Intermediate (WTI), with crude trading above $117/barrel on Friday following the announcement. Simply put, the increase is “not meaningful enough” to cover the Russian shortfall.
Adding to concerns is the fact that the group collectively continues to underproduce its target, most recently underproducing 2.6Mbpd below its stated target. Estimates from Platts Analytics shows that Saudi Arabia has around at least 820K bpd of spare capacity (over 1mbpd from peak), while UAE has around 800K bpd (1.1Mbpd from peak).
The six-month-long rally in the U.S. benchmark, the longest such run in more than a decade, looked poised to continue as the most recent inventory report showed that American crude stockpiles fell by more than twice what was anticipated last week. The drawdown in supplies comes as the market continues to grapple with undersupply and the start of summer, which is generally seen as heavier consumption months.
Additionally, adding upward pressure on oil prices is China continuing the easing of COVID-19 restrictions, as well as the EU partial ban of Russian oil imports, which was approved on Thursday. The ban is expected to be phased in and should shut out about 2mbpd of production by the end of 2022.
CORPORATE COMMENTARY
Despite JPMorgan’s global strategist, Marko Kolanovic, highlighting more supportive themes, which include:
- Oversold conditions and positioning
- China’s reopening
- Peak inflation
- Rising 2023 EPS consensus estimates
Corporate commentary leaned more negative throughout the week (outside of airlines with American Airlines, Delta Airlines, and Alaska Air – all who raised guidance). The theme we continue to see is the slowing of hiring paired with a myriad of headwinds facing U.S. companies as worries over global growth continue to rise. The number of news articles mentioning a “hiring freeze” has recently jumped to a level not seen since the first few months of the pandemic in 2020.
Below is a quick overview of some of the corporate commentary seen:
- Microsoft (-1.2%) announced they were cutting its May quarter guidance on Thursday, flagging FX headwinds, which they said will affect the top and bottom lines.
- Tesla (-7.4%) CEO Elon Musk also said they would be looking to cut about 10% of the company’s workforce and pause all hiring, adding, “he has a super bad feeling” about the economy.
- Coinbase (-11.5%): Also said they would freeze all hiring for as long as the macro environment required.
- JPMorgan (-0.9%): CEO Jamie Dimon gave comments this week at a conference, saying that the current challenges in the U.S. economy are a “hurricane” and urged the Fed to continue with its rate hikes and QT to eliminate liquidity in the system.
- Goldman Sachs (-3.0): COO also called the current backdrop the most complex, dynamic environment he has ever seen, adding there are a series of unprecedented factors hurting the economy ranging from a commodity shock to an unprecedented amount of monetary and fiscal stimulus.
International
The Bloomberg World index dropped 0.54% last week, with growth down 0.39% and value down 1.32%. Oil posted another weekly gain despite a decline mid-week after OPEC announced a production boost. China continues to ease COVID-19 restrictions and reopen the economy. On Sunday, Shanghai reported eight COVID cases, down from 22 on Saturday. Raw material prices continue to climb amid supply crunch. Last week, the Bloomberg commodity index hit a new high.
Europe
The Governing Council of the European Central Bank (ECB) will hold a press conference this week following its highly anticipated monetary policy meeting. Policy makers will attempt to find the right balance between fighting inflation and supporting struggling economies. Markets expect the ECB to end Pandemic stimulus and pave the way for a rate hike in the third quarter. However, some ECB members are in favor of a targeted bond-buying program to support borrowing costs, as the Italy 10-year yield recently surged to 3.31%, the highest yield since October 2018. The Euro STOXX index declined 0.82% last week, with travel and leisure down 4.51%.
In the United Kingdom, Boris Johnson won the key confidence vote after securing the backing of 211 Tory MPs. The British Prime Minister needed 180 votes to remain party leader amid his “Partygate” scandal that decreased his popularity. As 148 members of his party voted against him, Boris Johnson commented, “what we’re going to do now is take the opportunity to unite and deliver and continue with our priorities”. In May, a gauge of UK consumer confidence dropped to an all-time low amid rising prices. Manufacturing PMI slid from 55.80 to 54.60 during the same period. The FTSE 100 index declined 0.69% last week.
APAC
In China, officials declared that the recent outbreak of COVID-19 is under control. Entertainment facilities and cinemas are now open in most districts, with a maximum capacity of 75%. In May, the Manufacturing PMI remained slightly below 50 for the third consecutive month, at 49.60. The government is now focused on stimulating the economy to achieve the 4% average growth over the next five years highlighted in the Five-Year Plan. On Monday, regulators announced they will end the investigation of Didi Global and two other firms this week. Didi surged as much as 50% on the news and other Chinese tech names rallied in sympathy. The Shanghai composite index gained 2.08% last week.
In Japan, the yen fell to 131.63 per U.S. dollar, the lowest quote since April 2002. The widening yield gap between American and Japanese bonds is contributing to the yen weakness. Japan’s currency is now the worst performer of G-10 countries year-to-date. Bank of Japan (BOJ) Governor, Haruhiko Kuroda, continues to be dovish to allow the economy to fully recover. His 10-year term as a Governor will end on April 2023. According to a senior ruling party member, Prime Minister Fumio Kishida will pick a BOJ governor that will stick with the current monetary policy. The NIKKEI 225 index 3.66% last week.
Emerging Markets
In Brazil, President Bolsonaro proposes to change the constitution to pay for fuel voucher. The bill would allow the government to bypass the spending cap, as another fuel subsidy program would cost the government about $4.5 billion. In late May, the Lower House passed a bill that limit states fuel taxes at 17%. Senators have not backed the bill yet, but states are already threatening to appeal the law to the Supreme Court if it goes through, as it interferes with states’ power. Despite energy and raw materials cost pressures, Brazil PMI expanded in May to 54.2, from 51.2 a month earlier. Factory activity grew at the fastest pace since September 2021. Brazilian stocks dropped 0.75% last week.
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