Stocks marked their third straight week of gains, with help from supportive central bank messaging. The energy sector outperformed, boosted by a rally in crude oil amid U.S.-Iran tensions. The consumer discretionary sector underperformed. Treasurys were stronger this week, with the yield curve steepening again; the ten-year note yield briefly dipped below 2%, settling at 2.06%. The U.S. dollar came under pressure. Gold increased, as did oil.
There were dovish takeaways from this week’s Federal Open Market Committee (FOMC) meeting. The FOMC left rates unchanged at 2.25-2.50%, scrapped its “patient” language and flagged increased uncertainty about the outlook. Fed Chairman Jerome Powell’s statement noted the Committee saw a stronger case for more accommodation. European Central Bank President Draghi said at the annual ECB forum that if the outlook didn’t improve, additional stimulus would be needed. Draghi added that further cuts of interest rates and mitigating measures remain part of the ECB’s toolkit.
Upcoming talks between President Trump and Chinese President Xi are not expected to resolve major disagreements, though they could mark a new phase in the negotiations. This created some momentum in the market. During the week, Iran used a missile to shoot down a U.S. surveillance drone that it claimed had encroached on Iranian airspace. Though President Trump suggested the downing was “unintentional,” his provocative response to the incident weighed on the markets and catapulted oil prices upward. On Friday, Washington came close to launching a retaliation against Iran but it was called off at the last minute.
The Philadelphia Fed Manufacturing Business Outlook Survey fell from 16.6 in May to 0.3 in June. The Empire State Manufacturing index fell a record 26.4 points to -8.6. The May ISM manufacturing index fell to its lowest level since October 2016. The June NAHB housing market index came in below expectations, a reflection of rising development, construction costs and trade concerns. The IHS Markit Flash Manufacturing Purchasing Managers Index (PMI) dropped to 50.1 in June, the lowest reading since September 2009. Eurozone PMI increased, but Japan’s PMI fell once again, due to waning demand at home and abroad.