The major stock market averages are up modestly in early trading (Dow +39 pts; SPX +.1%). Gains are widespread, with the notable exception of telecoms, social media and some retailers. By the way, financials and healthcare, the two worst-performing sectors year-to-date, are faring much better this quarter. Also, we can’t overlook the fact that small-cap stocks are outperforming large-caps for the first time in quite a while. The Russell 2000 Index is up twice as much as the SPX this quarter. Today, the dollar is weaker and commodities are mostly higher. WTI crude oil is up to $51/barrel, a level not seen since October of last year.
Bonds are rising in price again as yields fall. Fed rate hike expectations are falling and inflation expectations remain low enough to keep a lid on longer-term bond yields. The 5- and 10-year Treasury yields are trading at 1.23% and 1.71%, respectively. The average fixed 40-year mortgage rate is down to 3.83%, and that’s driving up the volume of mortgage applications.
There are a couple of notable developments overseas to mention. The European Central Bank (ECB) has begun buying corporate debt as part of its quantitative easing program. The aim here is to drive down borrowing costs for higher-quality companies in Europe. The ECB is trying to weaken the Euro currency and stimulate growth. The ECB is very serious about driving yields lower; the German 10-year sovereign bond yield has fallen to just .06%. Separately, we understand industrial production in the UK posted its largest monthly gain in nearly four years. Drugs and autos fared especially well, but 10 of 13 manufacturing sectors posted gains. And finally, China’s imports fell only .4% y/y in May. That’s the smallest decline since late 2014 and it’s leading many economists to wonder if domestic demand in China is picking up. Exports, by the way, fell 4.1% y/y but that’s also improved over early 2016 levels.