Market Update

• Markets open lower despite overseas gains, oil spike.U.S. indexes are trading near flat this morning after a move higher throughout Thursday’s session. The largest moves yesterday came from defensive sectors telecom, utilities, and consumer staples. Overseas, European indexes are up in midday trade. Brexit campaigns are suspended asfter the tragic assassination of a member of British parliament who was in favor of remaining in the European Union. It is unclear what effect this will have on next week’s referendum. Dovish comments from St. Louis Federal Reserve Bank (Fed) President Bullard also have investors concerned about U.S. economic growth and the pace of Fed rate hikes. In Asia, the yen stabilized overnight and the Nikkei rose 1%, but still finished over 6% lower on the week. The Hang Seng and Shanghai Composite also posted gains to close the week. Elsewhere, WTI crude oil is enjoying a 2.5% bounce, COMEX gold is down modestly, and the yield on the 10-year note is up close to 1.6%.

Macro View

• Solid housing starts and building permit data in May. At 1.164 million, housing starts exceeded expectations (1.150 million) in May and matched the April reading; they are up a robust 10% from a year ago. Permits, which tend to be more of a leading indicator of future housing activity, fell short of expectations in May but accelerated from April and were up 1% from a year ago. Supported by low interest rates, a solid labor market, a pickup in household formation, modest home price gains in-line with incomes, and sound lending practices relative to the 2002-2007 housing boom, we continue to expect that housing will contribute positively to gross domestic product (GDP)growth in 2016 (as it has since 2011) via the residential investment category. However, at only 5% of GDP, housing has only a limited direct impact. We continue to expect that new home construction will be a plus for GDP growth in 2016, as it was from 2011-2015.

• Week ahead.The Brexit vote, Fed Chair Janet Yellen, and June Purchasing Managers’ Index (PMI) data highlight an otherwise quiet economic calendar. As was the case in the past few weeks, the week ahead is likely to be dominated by concerns of the result of the Brexit vote in the U.K. (see the recent Weekly Market Commentary). The vote is Thursday, and markets should begin to see preliminary results by 7 p.m. ET that day and final results are likely at around 2 a.m. ET on Friday, June 24. Earlier in the week, testimony from Fed Chair Yellen on monetary policy to the U.S. House and Senate will draw most of the attention. Data on June manufacturing in the Eurozone, U.S., and Japan are due on Thursday. It’s a relatively quiet week for central banks and for Chinese economic data.

• Crude oil check. Crude oil bottomed just over four months ago and over that time it gained nearly 100% from peak to trough. So far this week, crude has pulled back about 5% (as of last night), but the big question is, what could happen next? Today on the blog we will look at the only two other times that crude oil gained this much and what may be ahead.

• Big reversal day. The S&P 500 snapped its five-day losing streak in dramatic fashion, with a huge reversal off the lows yesterday. At its lows, the S&P 500 was down more than 1%, yet it managed to close green. The last time it did that was March 10. Off of the lows, the S&P 500 gained 1.3%, which was the largest bounce off the lows since February 24. Going back to October, that has happened six other times and the following day was higher each time.

Monitoring the Week Ahead

Friday

• Housing Starts (May)
• Mario Draghi Speech in Munich
• China: Property Price Indexes (May)

Click Here for our detailed Weekly Economic Calendar

 

Important Disclosures

Past performance is no guarantee of future results.

The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

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Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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