Market Commentary - June 16th, 2018

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Macro and geopolitical anecdotes dominated market psyche last week netting marginal gains in U.S. equity markets, a strong USD, and a flattening yield curve. It was the highest profile week of the year for monetary policy with pivotal developments from the Fed, ECB, PBOC, and BoJ. Trade disputes and Fed policy drove commodity prices sharply lower and the U.S. dollar to its strongest week since 2016.
Market Anecdotes
The FOMC met last week and hiked the Fed Funds rate by 0.25% as expected while forward expectations shifted from three hikes to four in 2018. Futures market probabilities for September and December rate hikes moved higher to 85% and 53% respectively.
The ECB managed to portray itself as both hawkish, by announcing plans to end their QE program in December, and dovish by signaling rates will likely be on hold until next summer. The ECB is seen as joining the Fed and BoE in transitioning to tighter monetary conditions.
The BoJ reduced inflation expectations and made clear that they intend to maintain QE asset purchases and their yield curve control program for the foreseeable future.
The Bank of China delivered arguably the biggest surprise by choosing not to hike rates along with the Fed, noting several slowing economic indicators domestically.
Bianco Research noted target rates for four major central banks (BoE, Fed, ECB, BoJ) show tightening conditions on a 5-year change basis for the first time since the financial crisis. This measure incorporates shadow rates which adjust for central bank balance sheet activities.
The tit-for-tat trade war narrative reared its head again last week as POTUS announced $50b worth of tariffs on 1,102 Chinese product lines focused on China's industrial sector. China quickly punched back announcing $34b in tariffs across 545 product categories primarily in U.S. commodity sectors. This round of tariffs looks unavoidable and are set to take effect on July 6th.
Despite G7 posturing and trade war rhetoric, the U.S. signed off on a $50b loan to troubled Argentina, the largest loan in the history of the IMF and an uncharacteristic nod to globalization.
Consumer discretionary stocks surged on news of a U.S. District Court ruling approving the merger of AT&T and Time Warner which may spark a raft of follow on consolidation plays.
Oil prices fell in anticipation of next week's OPEC - Non-OPEC meeting to determine production levels. The strong USD likely also factored into weak commodity prices across the board.
Economic Release Highlights
Y/Y changes in headline and core CPI were 2.8% and 2.2% respectively, confirming the upward trajectory of inflation and solidifying the Fed's path to higher rates.
Retail sales topped even the highest estimates, surging 0.8% in May for an annualized rate of 9.16%.
May's -0.1% industrial production result missed low expectations, reflecting softness in autos, high tech equipment, and business equipment. Mining activity, however, is running hot at 12.6% annualized growth driven by energy sector activity.
Small business optimism rose to its second highest level in the report's 45 year history.
U of Michigan Consumer Sentiment survey registered 99.3, its strongest reading in two months. Tariffs and trade wars are not impacting confidence in current conditions (117.9) but seem to be weighing on future expectations (87.9).
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