Weekly Market Update - June 2, 2020

General Market News:

• The 10-year Treasury yield opened at 0.66 percent on Monday, while the 2-year came in at 0.17 percent and the 30-year at 1.43 percent. We are set to get some May economic numbers this week, which should give us a clearer view on where we stand as an economy. The Federal Reserve meets next week, and, while it has done a lot and has essentially asked Congress to step in, it should be interesting to see what members have to say when faced with hard May economic numbers.
• Global equities rallied last week, as investors grew optimistic after Dr. Anthony Fauci said a vaccine could be available by November or December. For the second week in a row, value continued to outperform as the positive news saw beaten-down value stocks bounce back. U.S. and China trade tensions picked up again as the U.S. suspended Hong Kong’s special tariff rates following the proposal of a new national security law there. Emerging markets understandably lagged the S&P 500 and Dow Jones Industrial Average for the week, while international markets outperformed amid European reopenings. The top-performing sectors were financials, industrials, REITs, and utilities. Underperforming sectors were communication services, energy, and technology.
• The Conference Board Consumer Confidence Index for May was released last Tuesday. Confidence rose from a downwardly revised 85.7 in April to 86.6 in May. This was slightly worse than expectations for an increase to 87 but still a step in the right direction. Consumer expectations for the future increased during the month; however, views of the present condition worsened modestly. Altogether, this was a largely positive report because it indicates consumer confidence may have bottomed in April and could be set to rebound as states continue to reopen. As hopes of a swift economic recovery largely rely on a quick rebound for consumer confidence and spending, this report will be watched closely.
• On Tuesday, April’s new home sales report was released. New home sales came in much better than expected, increasing modestly from a downwardly revised annual rate of 619,000 in March to 623,000 in April, against forecasts for a fall to 480,000. Despite this better-than-expected performance, the pace of new home sales is still down notably from its recent high of 717,000, set in January. We saw strong growth in new home sales in 2019, and this momentum continued into 2020 before the pandemic hit. Looking forward, the slowdown in new home construction in March and April will likely serve as a headwind for future new home sales because of lowered supply in key markets.
• On Thursday, the second estimate of first-quarter gross domestic product (GDP) growth was released. Economic growth was revised down from an annualized –4.8 percent to –5 percent. page 2 of 4 Weekly Market Update JUNE 1, 2020 General Market News (continued) Personal consumption, the major driver of GDP growth in 2019, improved slightly to –6.8 percent annualized during the quarter, from an initial estimate of –7.6 percent. Despite this better-than-expected revision to consumption growth, this still represents the worst quarter for personal consumption since the second quarter of 1980. Although these very weak growth figures are concerning, they are likely just the tip of the iceberg; economists are forecasting a 33.5 percent annualized contraction for the economy in the second quarter.
• Thursday also saw the release of the preliminary estimate of April’s durable goods orders report. Orders came in slightly better than expected, falling by 17.2 percent during the month against forecasts for a 19 percent decline. As was the case in March, much of the decline in headline orders during the month can be attributed to a fall in volatile aircraft orders. Core durable goods orders, which strip out the impact of volatile transportation orders, came in much better than expected, falling 7.4 percent against calls for a 15 percent decline. While this result is a positive development, it still represents the largest single-month drop in core orders in more than a decade. Core durable goods orders are often used as a proxy for business investment, so this report indicates that already weak business spending in the first quarter likely worsened to start the second quarter.
• On Friday, April’s personal income and personal spending reports were released. Personal spending, which accounts for roughly two-thirds of total economic activity, fell by 13.6 percent during the month, worse than the expected 12.8 percent decline. This was the worst monthly decline in spending since records began in 1959. Personal incomes increased by 10.5 percent during the month, far surpassing estimates for a 5.9 percent decline. Incomes were boosted by the Coronavirus Aid, Relief, and Economic Security (CARES) Act payments to consumers during the month. Despite the better-than-expected result for income growth, the historically bad spending highlights the massive disruption to consumer spending that shelter-in-place orders had during the month.
• Finally, we finished the week with Friday’s release of the second and final estimate of the University of Michigan consumer sentiment survey for May. Consumer confidence fell slightly during the month, down from 73.7 midmonth to 72.3 at month-end, against expectations for a modest increase to 74. Despite the modest decline, this still represents a step in the right direction after the index hit an eight-year low of 71.8 in April. This echoes the results from the Conference Board Consumer Confidence Index, released on Tuesday. As is the case with that report, this will be a widely followed release because it will give a glimpse into how consumers are reacting to the easing of shelter-in-place orders as we head into the summer.