Friday June 30

Stocks rose modestly today to finish the first half of 2017 on a strong note. The S&P 500 rose 0.2% to 2,423 and the Dow Jones rose 0.3% to 21,350. Over the course of the week those indices were 0.6% and 0.2% lower respectively. The KBW Bank index and utilities both finished fractionally lower today. Economic data today showed that personal income rose 0.4% last month which was 0.1% higher than expected. Consumer spending rose 0.1% in line with expectations. The PCE Price Index both headline and core both rose 1.4% compared to expectations of 1.5%. That shows that inflation remains muted in the US which takes gives some ammunition for the doves in the FOMC. If the trend persists it could also be bearish for the dollar as inflation is picking up in other economies where central bankers are looking to raise rates. Data also showed that consumer sentiment was stronger than expectations. The theme of the week was rising yields globally. The 10 year German bund yield was up 21bp on the week and finished at 0.47% and the same maturity gilt rose 22bp to 1.26%. In the US today the 2 year Treasury yield rose 3bp to 1.39%. The 10 year Treasury yield rose 3bp to 2.30%. Accordingly 2yr vs 10yr finished at 0.91%. This week marked the first week since the start of May that the yield curve steepened over the 5 day span. Over the course of the week the 2 and 10 year were 5 and 12bp higher respectively. The dollar rose today against EUR and JPY in spite of the weak inflation data. USD rose 0.2% against EUR to $1.1423. USD rose 0.3% against JPY to Y112.49. USD fell 0.1% against GBP to $1.3024. Oil prices posted another strong day which could be reassuring for investors who feared another selloff similar to the start of 2016. WTI rose 2.9% to $46.21 and Brent rose 1% to $47.90.

Stock markets around the world have posted very broad gains in the first half of this year, which leaves investors wondering what might be in store next. Of the 30 largest stock indices around the world, 26 are in positive territory for the year and around half of those are at or near record highs. In the last 20 years there have been only four times when markets have been this broadly bouyant. Two times, in 1999 and 2007 the rally preceded a sharp downturn. The other two times in 2003 and 2009 preceded a multiyear rally. The rally this year has been driven by accommodative central banks, and in Europe decreasing political risk as anti EU movements has supported sentiment as well. The rally across different sectors has been fairly broad as well, as most sectors have risen with the exception of oil. One reason for concern could be that defensive shares have outperformed cyclical shares which could suggest that investors are turning bearish based on their positioning. Another big question mark is how central banks will unwind their accommodation. In many ways central banking policies are responsible for the impressive rally that has been experienced, and it remains to be seen how they will remove their presence from the market without leading to a selloff.

Bank shares have put in a strong performance this week as several factors turned in their favor. At the start of the week financials were supported by news out of Italy that the government was orchestrating a EUR 17bn bailout of two struggling Italian banks. Similarly there was consolidation in the financial sector in Spain which also suggests that the system is getting stronger. On Wednesday bank investors were pleased when all 34 of the banks passed the Fed’s stress tests which will allow them to return capital to shareholders. Between the five large US banks alone analysts anticipate that they will return around $100bn to shareholders, amounting to more than 100% of net income for this year on average. Also contributing to positive sentiment was the global bond selloff towards the end of the week driven by central bankers in the UK, Europe, and Canada catching investors off guard by suggesting they may soon shift their monetary policy stance. That led investors to believe that higher interest rates in those economies may not be too far on the horizon, which benefits bank earnings. Banks put in a strong week of performance, even as they have underperformed the broader market for much of 2017. However over the last couple of weeks that trend has reversed and banks have led the way as hot sectors, such as technology, have retreated. A lingering downside for banks is that economic growth, and therefore loan growth remains sluggish.

FT Alphaville published an article outlining some facts about shifts in the retail sector as it relates to employment and the macro economy in general. There has been a narrative  out there that excessive losses of jobs in the retail are a threat to the economy. However thus far job losses in the retail sector have been minuscule compared to the total number of people employed in the industry. From the macro level it appears that the shift from brick and mortar retail to e-commerce will benefit the economy through innovation and increased efficiency. On average it takes more than 8 employees in a department store to generate $1mm in sales per year. For e-commerce that figure is just 0.7 people so it makes sense that more effort is being allocated there. That could help explain why retail store closings this year could hit a record high. The jobs created in e-commerce also aren’t showing up in the data as clearly as the direct number of layoffs is. Economist Michael Mandel argues that the jobs created through e-commerce exceeds the losses in jobs from retail. On top of that e-commerce jobs tend to pay better than traditional jobs at both the entry and manager level. Over the long term that will be beneficial for the economy, however on the societal level its unlikely the people competing for e-commerce jobs will be the same people displaced from traditional retail jobs.





Friday June 30

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