As we reach the close of the month, the quarter, and the first half of the trading year, the broader picture for the U.S. economy is encouraging. After five straight days of selling the prior week, stocks staged a welcome snapback, and a number of the macroeconomic metrics that had been deteriorating are now beginning to recover.
The Broader Economic Backdrop
The overall U.S. economy is performing fairly well. Two important variables — interest rates and crude oil — both started the year low, rose sharply, and are now beginning to creep back down, which is a constructive sign for the months ahead.
Crude oil began the year below $60. Following a flare-up in geopolitical tension involving a strike on Iran, oil climbed to over $100. It has since receded and is now holding at or near the $70 level — meaningfully better than it was a short time ago. The world is, by definition, flush with crude oil. The key swing factor is the Strait of Hormuz: if disruptions there ease and oil can flow freely to global markets, prices could fall further from current levels. That said, disruptions of this kind happen all the time, so the risk of renewed volatility remains.
Interest rates tell a similar round-trip story. The 10-year yield started the year in January around 4.2%, climbed as high as 4.68%, and has begun to ease. With Kevin Warsh now in control of the Fed, his upcoming address to a European audience — at the central banking forum in Sintra, Portugal — looms as an important event. Other Fed speakers, including Beth Hammock, are also on the calendar this week.
Corporate earnings have been strong, and several market participants argue that earnings and fundamentals matter far more than geopolitical headlines. History supports this: looking back across market cycles to the 1920s, markets have tended to be up roughly 10% a year later, even after geopolitical shocks created near-term noise. The lesson is not to overreact to geopolitical events; the durable story is earnings. There have already been positive earnings surprises this season, with reports from names such as Nike and Constellation on the watch list.
Taken together, the combination of solid corporate earnings and the gradual unwinding of elevated rates and oil prices suggests the second half of the year could be quite interesting — provided these recovering metrics continue to improve.
The Japanese Yen at 40-Year Lows
The yen has sunk to new lows not seen since 1986 — a genuine 40-year low and a monumental moment for the currency. For American travelers heading to Japan, this translates into very favorable prices.
The driver is the interest-rate differential. U.S. rates are perceived to be more hawkish than Japan's rates and Japan's recent rate moves, so the dollar is gaining against the yen. The Japanese government has already intervened to support its currency and will likely do more, because a weak yen makes imported international goods increasingly expensive for Japanese buyers. Further intervention is something to watch closely, though the underlying rate dynamics continue to favor the dollar.
Metals: The FOMO Trade That Backfired
This has been the best first half of the year in five years — since the pandemic — yet metals have performed poorly, a striking contrast to the prior year's enthusiasm. Last year, gold and silver staged a powerful run, and many investors developed a fear of missing out, lamenting that they had missed the best move in decades. Those who chased that FOMO trade and bought gold near the top have suffered. Year to date, gold is down roughly 7%, trading around the $4,032 level after a high near $5,600 per troy ounce.
The real story behind the move is the dollar. When gold hit its peak near $5,600, the U.S. dollar index was at 95. The dollar has since rallied to 101, and gold has come down in tandem. There is a strong inverse relationship between the U.S. dollar and metals in general — as reliable now as it has ever been. When the dollar was sinking toward 95, that weakness fueled gold and metals to their all-time highs; as the dollar recovered, metals retreated. Simply overlaying a chart of the dollar on a chart of gold makes the inverse relationship plain. This is a lesson learned in the commodity markets, especially in metals — and the same relationship to the dollar applies to crude oil as well.
Housing and Labor Data Ahead
Fresh housing figures arrived with a mixed-to-stable tone. The Case-Shiller home price index was unchanged at 0.0% month-over-month; on an unadjusted basis it was up 1% month-over-month, in line with the prior month's reading. The 20-city year-over-year figure came in at 1.1%, slightly above the consensus of 0.9%. The FHFA house price index was down a tenth month-over-month and up 2% year-over-year — a tenth less than expected.
Attention now turns to the labor market. The JOLTS job-openings report is due shortly and will be the first look at the labor market this month. Last month's reading jumped to 7.618 million, and expectations are for something closer to 7.3 million. However, if the labor market is genuinely getting stronger, that number could beat expectations, since more job openings indicate a stronger, recovering labor market. Jobless claims are also on the docket. The strength or weakness of the U.S. dollar will remain a central thread tying all of these data points together.
