Volatility returned this week as the U.S. economy gradually reopened but fears of a second wave of infections weighed on the markets.
Stocks continued to rise on Monday following Friday’s strong May jobs reports. Questions still lingered as to why May added so many jobs given the weekly unemployment claims. One explanation was that the claims numbers may have been too high as laid off workers, struggling with antiquated online state unemployment systems, have filed more than once.
On Wednesday The Federal Reserve met and indicated they have no intention of raising interest rates before the end of 2022 and are studying ways on how to provide more support to the economy. Overall, this struck a more pessimistic tone than expected and contributed to a selloff. Also, the Organization for Economic Cooperation and Development released their forecast on Wednesday and forecast that global economic activity would shrink by 6% for 2020. This was twice as large of a drop as forecast by the International Monetary Fund in April. Furthermore, the OECD forecast that if there is a second wave of infections the global economy would shrink by 7.6% this year. Oil and energy stocks had rallied sharply from the April lows on reopening hopes and the OPEC+ agreement to extend the coronavirus cuts for another month through the end of July. On Wednesday oils resurgence was killed by a huge surge in U.S. inventories of both crude oil and gasoline. Also on Wednesday, were comments from Anthony Fauci expressing concerns about the protests causing a resurgence in the virus.
On Thursday, the city of Huston backtracked on reopening and closed restaurants after hitting their highest increase in new cases on Wednesday. This added to the selloff frenzy on Thursday with the biggest drop since March.
Friday saw a significant bounce in equities. However, for the week stocks ended substantially lower.
Treasury yields fell sharply as the 30-year bond fell to 1.463% but the 10-Year note fell to 0.71%. Crude oil fell to $36.42 and natural gas fell to $1.74 per MMBTUs. The U.S. dollar ended the week higher against a basket of currencies and gold prices rose to $1738.80 an ounce.
In the economic numbers this week:
- China reported
- Exports in May were down 3.3% from a year earlier while imports fell 16.7% causing the trade surplus to surge. The biggest change was a large increase in Medical exports.
- Factory gate prices fell 3.7% in May from a year earlier.
- Consumer prices rose 2.4% in May from a year earlier.
- The Labor Department reported:
- 1.5MM workers filed initial unemployment claims last week down from 1.9MM the week before.
- Continuing claims fell slightly from a downwardly revised 21.3MM to 20.9MM as some return back to work.
- Consumer prices fell 0.1% in May. This follows declines of 0.8% in April and 0.4% in March. Excluding volatile food and energy prices also, fell 0.1% in March.
- The EIA weekly oil report is here wpsrsummary. Also, the EIA reported in the past week:
- Field production of crude oil dropped from 11.2MM barrels to 11.1MM barrels per day. The peak production at the end of February was 13.1MM barrels per day.
- Natural gas storage rose by 93BN cubic feet and is above the five year average at this time of year.
- Baker Hughes reported the number of active oil rigs fell 7 to 199 and the number of active natural gas rose 2 to 78.
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Loren C. Rex, CFP®, AIF®, MA Erik A Smith AIF®
President Managing Partner
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