RECAPPING LAST WEEK

U.S. equity indices rallied into the weekend, boosted by a better-than-expected employment report and optimism for U.S.-China trade talks. The Russell 2000 and Nasdaq Composite indices rose 3.2% and 2.2%, respectively, while the S&P500 gained 1.5%. Eight of eleven S&P500 sectors were positive, led by strong gains in technology. Consumer discretionary lagged as Tesla shares were hit hard by CEO Musk’s public spat with President Trump over the latter’s tax and spending bill. Crude oil prices jumped 6.3% after OPEC+ left July output increase levels unchanged, quelling fears of a surprise larger amount. Gold futures spiked early in the week after the White House announced additional tariffs on steel and aluminum, but the precious metal then drifted down, finishing higher by just 0.7%.

U.S. Treasury yields rose after Friday’s non-farm payrolls report, reversing the easing caused by weaker data that preceded it. May’s total of 139,000 jobs added beat muted expectations, while the unemployment rate held steady at 4.2%. The count from the two preceding months were revised down by nearly 100,000 jobs, however, which could be a sign of slowing growth. Weekly unemployment claims, still at historically low levels, rose to their highest point in eight months. However, the Federal Reserve seems likely to keep rate cuts on hold until at least September, recognizing firm ongoing wage growth and a labor force that’s shrinking due to immigration restrictions.

In other economic data, U.S. services sector activity contracted unexpectedly last month with the ISM PMI survey reading falling to 49.9 from 51.6. Respondents cited planning struggles due to tariff uncertainty, which was reflected in a dip in new orders and a surge in prices paid. The manufacturing ISM PMI edged down to a six-month low of 48.5 as suppliers took longer to deliver raw materials due to trade issues. Overseas, the European Central Bank cut rates by 25 basis points to 2% as inflation eased to 1.9% YoY in May. The ECB provided little guidance as to their next move. The Bank of Canada opted to hold rates steady at 2.75% and wait for more developments on U.S. trade policy. In China, the disproportionate effect of tariffs on small- and medium-sized companies was evident in the Caixin PMI surveys, which revealed slumping export orders in May. China’s restrictions on exports of rare earth metals and magnets were already being felt as several European car part manufacturers halted production.

THE WEEK AHEAD

A typically quieter week for economic data awaits following the U.S. labor market updates.
Investors will likely focus on trade and U.S. fiscal policy developments along with new inflation data. The U.S. Court of Appeals could decide this week whether to overturn the lower court’s block of reciprocal tariffs, though the case could still end up at the Supreme Court. Wednesday’s CPI report will be one of the final important data points for the Fed to consider before their June 17-18 meeting. While disinflation trends have fueled optimism for rate cuts, the FOMC seems likely to remain wary of easing too soon in the face of uneven trade policy and recent PMI survey data indicating higher output prices.

The producer price index will follow on Thursday. The preliminary consumer sentiment reading for June arrives Friday along with an update on inflation expectations. The ten- and 30-year Treasury auctions will be closely monitored for any signs of reduced appetite for U.S. longer-term debt. On the international side, China releases its latest inflation update, while May’s trade balance figures are also on the docket. Although last week’s phone call between Presidents Xi and Trump was viewed as a positive, it’s still unclear how far
apart the countries remain on an actual trade deal. The UK’s monthly GDP and employment reports round out the overseas agenda.

(Schwab)