WEEKLY MARKET SUMMARY

Global Equities: Global equity prices softened from all-time highs during the week on fears that monetary authorities may pull the accommodative band aid off too quickly by raising rates. This led to large-cap technology outperforming, with the Nasdaq Composite down -0.3% but relatively higher than other benchmark indices. Financials and industrial took it on the chin due to a flattening yield curve, as the Dow Jones Industrial finished down by -3.4% and the S&P 500 lower by -1.9%. International equities were lower as well, with the iShares MSCI Emerging Market ETF (EEM) holding up better than the developed market focused iShares MSCI EAFE ETF (EFA), finishing -1.9% and -3.1% respectively.

Fixed Income: The Federal Reserve Open Market Committee (FOMC/Fed) meeting caused heavy volatility in the bond market, as short-to-medium term interest rates increased as long-term interest rates fell. The flattening of the yield curve signals that markets doubt the Fed’s willingness to tighten rates further and remain skeptical that inflation is here to stay. The yield on the 10-year US Treasury Note jumped to nearly 1.60% immediately after the release, though finished the week near 1.45%. Long-term Treasury prices benefitted from the move, while corporate bonds ended the week mixed.

Commodities: Oil prices ended a volatile trading week slightly higher, with US West Texas Intermediate (WTI) closing the gap between the international Brent Crude benchmark thanks to the summer driving season increasing domestic demand amid stagnant North American production growth. WTI finished the week close to $71.60/bl, while Brent finished the week near $73.50/bl. The bubble in lumber prices seems to have burst, which is good news for homebuilders, as the price for random length lumber has fallen by -40% since May to $914 per contract.

WEEKLY ECONOMIC SUMMARY

Federal Reserve Meeting: The Fed expressed a higher degree of confidence in the US economy and persistent inflation during their two-day meeting during the week. This meeting also included the release of the newest dot plot of members’ future interest rate forecasts which spooked equity markets until Chairman Jerome Powell stated not to read too much into the dot plot. There was no insight into timing on eventual tapering of the $120B per month bond buying program, however, non-voting member James Bullard hinted that reducing the amount of mortgage-backed securities purchases may come soon.

Producer Prices Jump: The producer price index for final demand jumped to 6.6% year-on-year (YoY) for the month of May, with goods prices making up most of that rise. Excluding food & energy, prices increased by 5.3% YoY in May according to the Bureau of Labor Statistics (BLS). Both statistics were higher than consensus expectations and were the highest since the BLS began tracking the indices, back in 2010.

Jobless Claims Remain Elevated: Initial claims for unemployment increased to 412k during the week ended June 12th from the prior week of 376k, while expectations were for initial claims to remain flat. It was the highest level in a month as claims have receded from all-time highs due to the pandemic. Pennsylvania and California accounted for the largest increase in state claims. The lagged figure for continuing claims remained mostly steady, at 3.52M.

CHART OF THE WEEK

The Chart of the Week is a year-to-date chart of the current yields for the 5-Year US Treasury versus that of the long 30-Year US Treasury, representing the market yield requirement for accepting duration risk. This week’s FOMC meeting surprised markets with two anticipated rate hikes before the end of 2023, and though this is not overly “hawkish” in terms of monetary tightening, markets participants are viewing this as a policy mistake and are betting that interest rates will be lower in the longer-term. We currently have tactical exposure to long-term Treasuries and remain appropriately invested in all Treasury maturities in the buy-and-hold portion of Hanlon All-Weather models.

Chart data provided by stockcharts.com. Commentary and opinions are those of Hanlon Investment Management.

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