expectations, as measured by the breakeven inflation rate on five-year U.S. inflation-protected bonds, have remained static for a few weeks now. This is a negative sign that investors are not confident that global relations are taking place.

Rate Hike

  • The U.S. dollar fell for the second week in a row and appears more and more like it is in a downtrend. This is negative for the U.S. consumer and any related companies.

Opportunities

  • The NFIB Small Business Optimism Index rose to 98.3 for the month of May, surpassing analysts’ forecast. This is very positive for U.S. growth, especially with the Federal Reserve looking to raise interest rates in September.
  • Consumer confidence remains considerably strong, as the University of Michigan Consumer Sentiment Index jumped to 94.6 from 90.7 the prior month. Consumer-oriented stocks could receive further tailwinds from the expected increase in spending.
  • Industrial production growth for the month of May will be released next week. This indicator is expected to increase from the prior month’s disappointing reading.

Threats

  • Germany’s two important economic surveys, the ZEW Germany Assessment of Current Situation and the ZEW Germany Expectation of Economic Growth, will be released next week as well, and are expected to yield negative results.
  • Germany’s consumer price index (CPI) inflation data for the prior month will be released next week and is expected to remain unchanged, according to analysts.
  • Certain yield-sensitive areas such as utilities and MLPs remain under considerable pressure given the recent breakout in the U.S. government 10-year yield.

The Economy and Bond Market

Greece’s financial future is looking more precarious after another week of debt negotiations yielded no tangible results. Global stocks surged and bonds sold off sharply as hopes for a Greek agreement rose before retracing that movement when the stalemate continued. The 10-year U.S. Treasury yield ended the week at 2.38 percent and the 10-year German bund yield fell to 0.83 percent after hitting resistance midweek at 2.5 percent and 1.0 percent, respectively. WTI crude oil ended the week just shy of $60 per barrel, with Brent crude just under $64.

Strengths

  • A big puzzle in the U.S. economy in recent months is weak consumer spending despite strong job growth, a mild pick-up in wages, improved confidence and low gas prices. Hence, the strong May retail sales report was a relief. Headline sales jumped 1.2 percent and prior months were revised higher. The U.S. consumer isn’t dead after all.
  • The Federal Reserve’s Labor Market Conditions Index (LMCI) rose 1.3 points in May, after declining by 0.5 in April. The improvement in the index is consistent with improvements in the employment report, although the LMCI reflects a much broader set of market indicators. Prior months were revised up as well.
  • Wholesale inventories added 0.4 percent in April, above the expected 0.2 percent month-over-month and up from 0.2 percent month-over-month in March (revised up from 0.1 percent initially). The stronger-than-expected data bodes well for second-quarter GDP growth.

Weaknesses

  • The volatility in government bond markets is now much greater than in the stock markets for the first time in a very long period. This type of movement is unusual and serves as yet another example of the dangerous distortions being created by the G7 countries and central banks. The volatility has been fueled by the increasing probability of tightening by the Federal Reserve. Additionally, the lack of liquidity in bond markets is a consequence of (1) the G7 central banks buying so many government bonds and (2) the regulatory-driven dramatic reduction in the sell-side’s holdings of debt securities on their own balance sheets.

Rate Hike

  • Overseas disinflationary pressure continues to be present as the import price index remains in deep negative territory at -9.6 percent.
  • Although volatility moderated towards the end of the week, both U.S. and German yields remain near multi-month highs. This week saw the largest weekly global bond outflow in 18 months with $5.9 billion in outflows.

Rate Hike

Opportunities

  • The Empire State Manufacturing Index is likely to rise to 6.0 in June after two months of relatively disappointing reports. The biggest driver supporting the rise will be aggregate demand, which has shown signs of resurgence following the slowdown at the beginning of the year.
  • May housing starts could dip back to a 1.05 million unit rate (SAAR) as a giveback from the exceptional gain in April. However, this would leave the three-month moving average at the same pace, up from the 993,000 rate in April. Looking forward, housing starts should continue on an upward trajectory as household formation recovers along with improving labor market conditions.
  • The Federal Reserve is unlikely to hike rates at the June Federal Open Market Committee (FOMC) meeting, but September should remain in focus as recent activity data has improved on net. The assessment of the economy should note modest improvement in the data on net since the April meeting, particularly the labor market, which has been key to Fed hiking plans. Conversely, core PCE inflation has softened recently, but the FOMC will likely attribute that to transitory factors. The improved U.S. outlook could be partially offset by an increase in global risks such as Greece. There should be no substantive changes to the policy discussion, however, as the FOMC continues to be data dependent.

Threats

  • May’s headline consumer price index (CPI) data, to be released next week, will likely jump to the expected 0.5 percent month-over-month, particularly due to the increase in energy prices.
  • The current account deficit likely swelled in in the first quarter and could end up being higher than the expected -$116.4 billion, owing to the deterioration in goods and services. It looks as though the strong U.S. dollar appreciation has held back exports, especially on the manufactured goods side.
  • With the rise in government bond yields, 30-year fixed mortgages have been pushed to multi-month highs, potentially deterring first-time homeowners.

Gold Market

For the week, spot gold closed at $1,181.65 up $9.65 per ounce, or 0.82 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, lost 1.59 percent. The U.S. Trade-Weighted Dollar Index slipped 1.39 percent for the week.

Date Event Survey Actual Prior
Jun-11 China Retail Sales YoY 10.10% 10.10% 10.00%
Jun-11 U.S. Initial Jobless Claims 275K 279K 276K
Jun-12 U.S. PPI Final Demand YoY -1.10% -1.10% -1.30%
Jun-16 Germany CPI YoY 0.70% 0.70%
Jun-16 Germany ZEW Survey Current Situation 63 65.7
Jun-16 Germany ZEW Survey Expectations 37.3 41.9
Jun-16 U.S. Housing Starts 1100K 1135K
Jun-17 Europe CPI Core YoY 0.90% 0.90%
Jun-17 U.S. FOMC Rate Decision (Upper Bound) 0.25% 0.25%
Jun-18 U.S. CPI YoY 0.00% -0.20%
Jun-18 U.S. Initial Jobless Claims 277K 279K

Strengths

  • Gold traders are split over the prospects for gold after prices recovered from an 11-week low reached on June 5. Shanghai Gold Exchange withdrawals reached 1,015.4 million tons as of June 5 and are on track to exceed last year’s withdrawals.