RECAPPING LAST WEEK
U.S. equity indices rallied sharply for a third straight week as Middle East tensions rapidly
deescalated. Iran’s statement that the Strait of Hormuz was open for commercial shipping during
the ceasefire window throttled risk on across all asset classes on Friday. Oil prices fell over $10
per barrel on Friday alone, helping to ease inflation fears across the globe. The S&P500 and
Nasdaq-100 advanced 4.5% and 6% respectively, meaning the former has risen 13% the latter
17% since their March 31 st lows. Small cap stocks were even stronger, with the Russell 2000 and
Nasdaq Composite soaring 6% and 7%. Within the S&P500 itself, the winning themes were
growth and travel. The Iranian situation is far from resolved, so while the progress toward peace
is welcome, macro investors can likely expect volatility to persist a bit longer. Rate-sensitive
sectors showed continued vulnerability: housing, for example, remained a weak spot, with existing
home sales falling to 3.98 million and the NAHB coming in at 34, indicating builder sentiment
remains under pressure. Small business optimism declined to 95.8, but both here and with
housing, these readings are somewhat moderated by indications of more favorable conditions on
the horizon. On the inflation front, PPI was impacted significantly by the situation in Iran, rising
0.5% m/m (4.0% y/y), though hopefully that situation will prove temporary. Growth indicators
remain mixed but stable with the Empire manufacturing index coming in weak vs. a stronger Philly
report. Industrial production dipped, but labor markets remained firm as jobless claims were
below expectations at 207K. Overall, the US economy looks stable and benefited from a big boost
on Friday. The energy shock had been a huge weight on every economy on Earth—the latest
developments increased the likelihood that global growth for the year would meet the IMF’s base
case of 3%, rather than the 2% that could have prevailed had the Strait remained closed.
European industrial production remained positive, though the ECB still notes downside growth
risks and upside inflation risks. The drop in energy prices also provides some cushion. UK GDP
came in at 0.5% and Australia’s unemployment rate held steady at 4.3%, indicating the labor
market remains tight. China’s data reinforces the stabilization narrative with GDP printing at 5%
and industrial production at 5.7%. Their exports were weak at 2.5% but import growth of 27.8%
signaled internal resilience. The global economy is hoping inflation expectations and lower
geopolitical tensions will be tempered by additional drops in energy prices. If that can hold,
conditions should be favorable for the near future.
THE WEEK AHEAD
The market’s first question this week is whether this relief rally can survive contact with real data,
even more so after the weekends added uncertainty. The focus shifts back to fundamentals with
U.S. retail sales, PMIs, jobless claims, and a heavy slate of earnings. The question of whether the
risk will continue easing, providing the global economy with a soft landing, depends on continued
inflation easing, durable growth, and central bank actions. Speaking of central banks, Fed politics
become a market event on Tuesday when President Trump’s Fed chair nominee, Kevin Warsh,
appears at his Senate hearing. Investors will parse Warsh’s responses for clues about future rate
policy. In the U.S., PMIs and core PCE will give some guidance on inflation. Consumer spending
and income data along with the revised UoM consumer sentiment survey will provide an updated
reading on the recently tenuous health of the American consumer. Globally, energy prices and
supply will be paramount, as additional energy spikes would overpower everything else. In the
absence of another crisis, investors will look to European activity data with retail sales and
consumer confidence reports midweek. UK data will be plentiful, with the claimant count change,
unemployment rate, CPIs, and PMI’s all arriving this week. U.S. crude oil inventories on
Wednesday will hold more weight than normal, and defense contractors Northrop Grumman and
Lockheed Martin, plus AT&T, Tesla, and several airlines will report earnings during the week
(Schwab)
