Monthly Archives: September 2018

Market Insights 9/28/2018

The U.S. markets finished out Q3 nearly unchanged amid some mixed news on the economic front, some attention to geopolitical events and an eye toward the drama in Washington.

Treasury yields dipped but the U.S. dollar extended a recent run as of late, as Italian concerns and trade uneasiness lingered.

Crude oil prices jumped and gold was higher.

The Markets…

The Dow Jones Industrial Average rose 18 points (0.1%) to 26,458

The S&P 500 Index was nearly unchanged at 2,914

The Nasdaq Composite inched 4 points (0.1%) higher to 8,046

In heavy volume,955 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

Crude oil rose $1.13 to $73.25 per barrel and wholesale gasoline was up $0.02 at $2.09 per gallon

The Bloomberg gold spot price gained $9.34 to $1,992.17 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 95.14

Markets were mixed for the week, as the DJIA fell 1.1%, the S&P 500 Index lost 0.5%, while the Nasdaq Composite increased 0.7%

Personal income and spending rise, consumer sentiment revised lower but at 6-month high

Personal income rose 0.3% month-over-month in August, versus the Bloomberg forecast of a 0.4% gain, and matching July’s unrevised rise. Personal spending gained 0.3%, in line with estimates, but below July’s unrevised 0.4% gain. The August savings rate as a percentage of disposable income was 6.6%.

Treasuries were mostly higher, as the yield on the 2-year note declined 3 basis points to 2.80% and the yield on the 10-year note dipped 1 bp to 3.04%, while the 30-year bond rate was little changed at 3.18%.

The Fed’s rate hike decision, which included updated economic projections and a press conference by Chairman Jerome Powell in her latest article, Tighten Up: Fed Raises Rates Again. Liz Ann notes that yesterday’s decision on rates and the accompanying statement reinforces an upbeat assessment of the economy; but a need to remain vigilant with inflation (and trade risks). We feel the removal of the “accommodative” language is seen as giving the Fed more flexibility both in future actions as well as communications.

The final September University of Michigan Consumer Sentiment Index was adjusted slightly lower to 100.1, from the preliminary 100.8 figure, and versus forecasts of 100.6. However, the index was above August’s 96.2 level and remained at a 6-month high. The downward revision came as both the expectations and current conditions components of the survey were adjusted lower, but both were up solidly versus August’s figures. The 1-year inflation forecast declined m/m to 2.7% from August’s 3.0% and the 5-10 year outlook dipped to 2.5% from 2.6%.

Europe falls as financials and Italian markets drop, Asia mixed on trade

European equities dropped broadly, despite some continued weakness in the euro and British pound as the U.S. dollar extended a run in the wake of this week’s third Fed rate hike of the year. Financials fell to weigh on the markets as Italian stocks tumbled on the heels of the release of Italy’s budget target that came in above what some had anticipated. The budget target also appeared to foster concerns about the potential reaction from ratings agencies and what the European Commission’s response may be. As such, Italian bond yields surged, with the 10-year rate jumping about 25 bps. Bond yields outside Italy were mostly lower.

Stocks in Asia finished mixed as the global markets continued to grapple with persisting trade uneasiness, while the yen weakened to help Japanese stocks continue to grind higher despite mixed economic data. Japanese equities rose solidly, with a host of data being digested, headlined by an unexpected dip in the nation’s unemployment rate and a larger-than-expected rise in retail sales, which was countered by a softer-than-expected read on industrial production. Mainland Chinese stocks and those traded in Hong Kong gained ground in the final trading session of the quarter that has seen the region’s stock markets slide on escalated trade tensions and festering concerns toward the emerging markets.

Markets in South Korea and India traded lower, with the latter extending a monthly drop that has come from liquidity concerns, as well as uneasiness regarding the weakening rupee and increased inflation pressures, likely exacerbated by the rise in the U.S. dollar, which has added to a recent run in the wake of this week’s third Fed rate hike of the year.

WEEK IN REVIEW: Stocks mixed on week as Fed, oil, trade and politics command attention

U.S. stocks finished mixed—but posted a strong Q3 advance—with trade uncertainty remaining a source of market skittishness as further tariffs between the U.S. and China went into effect and the latter reportedly declined a next round of talks. Enduring drama in Washington was also met with a persisting U.K. Brexit standoff, but Italy’s fiscal turmoil appeared to take top billing on the global political front to unnerve the markets. The Fed hiked rates for a third time this year as widely expected, but kept alive the possibility of another increase this year and suggested three more moves next year after upgrading the economic outlook.

The solid economic backdrop was on display this week, as Q2 GDP growth was unrevised at a 4.2% quarter-over-quarter annualized rate, new home sales rose more than expected and Consumer Confidence jumped to an 18-year high. Treasury yields were mixed-to-little-changed as the markets grappled with the Fed decision and exacerbated global uneasiness, while the U.S. dollar rebounded from last week’s drop. Crude oil prices extended a rally amid continued supply concerns. Materials and financials saw heavy pressure to weigh on the markets, but the energy sector posted a strong rally and technology issues gained ground.

Next week, the economic calendar will be robust as we head into Q4, courtesy of the ISM Manufacturing Index and ISM non-Manufacturing Index, monthly auto sales, factory orders and the trade balance. However, Fed monitoring is poised to remain in high gear, with two speeches from Chairman Jerome Powell preceding Friday’s September non-farm payroll report.

U.S. stock indexes again hit record highs but sentiment and action below the surface may indicate a less bullish picture. The uptrend should continue, but risks have risen, and we believe the signal is for investors to have a neutral stance. Higher oil prices could benefit Canadian and emerging market stocks, but also have the potential to impact central bank actions.

Market Insights 9/27/2018

U.S. equities rose, recovering from a string of declines that came following yesterday’s rate hike from the Federal Reserve, as well as continued trade uncertainties and drama in Washington.

Treasury yields were mixed and the U.S. dollar rose following a heavy economic calendar that offered a mixed durable goods orders report and an unrevised Q2 GDP figure.

Crude oil prices were higher and gold lost ground.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 55 points (0.2%) to 26,440

The S&P 500 Index was up 8 points (0.3%) to 2,914

The Nasdaq Composite increased 52 points (0.7%) to 8,042

In moderate volume 751 million shares were traded on the NYSE and 2.0 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.55 to $72.12 per barrel and wholesale gasoline was a $0.02 higher at $2.07 per gallon

The Bloomberg gold spot price declined $9.71 to $1,184.73 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.8% higher to 94.93

Durable goods orders mixed, Q2 GDP unrevised, headlining a heavy economic docket

August preliminary durable goods orders rose 4.5% month-over-month, compared to the Bloomberg estimate of a 2.0% rise, and July’s 1.7% decline was unrevised. Ex-transportation, orders were up 0.1% m/m, versus forecasts of a 0.4% rise and compared to July’s upwardly-revised 0.2% gain. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, fell 0.5%, below projections of a 0.4% gain, and the prior month’s figure was revised slightly lower to a 1.5% increase from the initially reported 1.6% rise.

The final look (of three) at Q2 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 4.2%, unadjusted from the first revision to match expectations. Q1 GDP expanded by an unrevised 2.2% rate. Personal consumption was unrevised at a 3.8% gain, in line with estimates, and compared to the unrevised 0.5% increase posted in Q1.

On inflation, the GDP Price Index was unadjusted at a 3.0% rise, matching forecasts, while the core PCE Index, which excludes food and energy, was revised higher to a 2.1% gain, from the previous 2.0% increase, where it was expected to remain.

Weekly initial jobless claims increased by 12,000 to 214,000, versus estimates calling for a rise to 210,000, with the prior week’s figure being revised higher by 1,000 to 202,000. The four-week moving average ticked higher by 250 to 206,250, while continuing claims grew by 16,000 to 1,661,000, south of estimates of 1,678,000.

Pending home sales fell 1.8% m/m in August, versus projections of a 0.5% decrease, and following the downwardly-revised 0.8% decline registered in July. Sales were 2.5% lower y/y, compared to the expected 1.0% drop. Pending home sales reflect contract signings and are a gauge of the pipeline of existing home sales, which were flat in August, snapping a string of monthly declines.

Treasuries were little changed, as the yield on the 2-year note was 1 basis point higher at 2.83%, while the yields on the 10-year note and 30-year bond were flat at 3.05% and 3.18%, respectively.

The Fed’s rate hike decision, which included updated economic projections and a press conference by Chairman Jerome Powell clarifies yesterday’s decision on rates and the accompanying statement reinforces an upbeat assessment of the economy; but investors need to remain vigilant with inflation and trade risks. We conclude that the removal of the “accommodative” language is seen as giving the Fed more flexibility both in future actions as well as communications.

The week’s economic calendar will culminate tomorrow with personal income and spending, forecasted to show income increased 0.4% m/m during August, and spending to have risen by 0.3% m/m, as well as the final University of Michigan Consumer Sentiment Index for September, projected to post a level of 100.5.

Europe shrugs off data, Fed and political uncertainties, Asia lower

European equities finished mostly higher, with the euro and British pound losing ground versus the U.S. dollar, which found some support while the global markets scrutinized yesterday’s monetary policy decision out of the U.S. that delivered a highly-expected third rate increase of the year. The accompanying statement and press conference from Fed Chairman Jerome Powell garnered some attention as the markets tried to assess the probabilities of a fourth rate hike in December and further moves next year.

In economic data in the region, German consumer confidence and consumer price inflation figures came in above expectations, while Eurozone economic sentiment declined more than expected. Political uncertainty continued to fester on both sides of the pond, with the exacerbated turmoil in the U.S. being joined by escalated Italian fiscal concerns as the nation faces a budget deadline, but some last-minute political infighting threatened an agreement. Also, U.K. Brexit ambiguity lingered. Italian stock markets lagged and the nation’s interest rates moved higher, but most other bond yields in the region finished little changed.

Stocks in Asia finished mostly to the downside, following yesterday’s move in the U.S. markets in the wake of the Fed’s third rate hike of the year. The decision appeared to foster some scrutiny of the statement, economic projections and comments from Fed Chair Jerome Powell as the markets project whether a fourth increase may be in the offing for December and how many moves are likely next year.

Stocks in Japan fell, trimming a recent run, with global trade concerns also lingering to join the Fed scrutiny and the yen gaining some ground.

Chinese equities and those traded in Hong Kong declined and stocks in Australia and India were also lower, while South Korean markets returned to action after being closed for holidays until today, finishing higher.

Random Thoughts

Historically, the S&P 500’s performance in the third quarter of any year – and midterm election years in particular – typically sends chills up the spine of seasonal trend followers.

However, this year’s 7.3% QTD price jump through September 25 has resulted in a dual-emotional investor response: euphoria over the quarter just ended, but foreboding over the quarter to come. The question frequently asked today is “will Q3’s stronger-than-average price gain for the S&P 500 end up stealing from Santa?”

In other words, does the market usually take a breather in Q4 after strong Q3s, especially in midterm election years? History reminds us that a favorable Q3 was followed by an average price gain of 3.8% in Q4 of all years since 1945, and 7.1% in midterm election years, with both scenarios posting positive results more than 80% of the time.

Market Insights 9/26/2018

U.S. equities finished near the lows of the day, paring gains that came after a widely-expected increase to the Federal Reserve’s target range for the Fed funds rate, following comments from Fed Chair Powell in his press conference.

Treasury yields fell and the U.S. dollar was higher following the Fed decision, and as new home sales came in roughly as expected. Crude oil prices fell on the heels of a bearish oil inventory report, and gold was also lower.

The Markets…

The Dow Jones Industrial Average fell 107 points (0.4%) to 26,385

The S&P 500 Index was down 10 points (0.3%) to 2,906

The Nasdaq Composite declined 17 points (0.2%) to 7,990

In moderate volume 829 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil fell $0.71 to $71.57 per barrel and wholesale gasoline was a $0.01 lower at $2.05 per gallon

The Bloomberg gold spot price declined $6.37 to $1,194.85 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% higher to 94.23

Fed Continues to normalize Interest Rates

The Federal Open Market Committee (FOMC) concluded its two-day monetary policy meeting. As expected, the Fed increased its target range for the Fed funds rate to 2.00%-2.25% in a unanimous vote. The Committee noted that growth has been strong and that the labor market has continued to strengthen, while saying that inflation has remained near its two-percent target range. A notable change to the Committee’s statement garnered extra attention, as the Committee removed its long-standing view of monetary policy as “accommodative”.

Updated economic projections were also released, with the Fed slightly increasing its current year and 2019 forecasts for GDP and providing a slight upward adjustment to its unemployment rate projection for the year, while leaving its inflation forecasts unchanged.

Additionally, the interest rate expectations, known as the “dots plot”, showed that most members now anticipate at least one more rate hike for the year and three more in 2019, unchanged from its prior forecast. In his scheduled press conference after the statement, Chairman Jerome Powell reiterated the Committee’s goal of a gradual return to normal policy, stating that such is helping to sustain the U.S. economy, while also noting that dropping the “accommodative” language in its statement does not indicate a policy change.

Powell also indicated that fiscal policy was indeed helping the economy, but “we have been on an unsustainable fiscal path for a long time, and there’s no hiding from it.” Regarding trade, the Chairman said that the impacts from tariffs seem to be relatively small, but it could put upward pressure on retail prices going forward, as businesses have expressed concerns over trade issues.

New home sales rose 3.5% month-over-month in August to an annual rate of 629,000 units versus the Bloomberg forecast calling for 630,000 units, but July’s figure was downwardly-revised to a 608,000 unit pace. The median home price rose 1.9% y/y to $320,200. New home inventory dipped to 6.1 months of supply at the current sales pace from 6.2 months in July. Sales jumped m/m in the Northeast and were up in the Midwest and West but declined in the South. New home sales are based on contract signings instead of closings.

The MBA Mortgage Application Index increased 2.9% last week, following the prior week’s 1.6% rise. The upward move came as a 3.2% advance in the Refinance Index was accompanied by a 2.6% increase in the Purchase Index. The average 30-year mortgage rate jumped 9 bps to 4.97%.

The housing market has been an area of economic concern in an otherwise solid backdrop and deteriorating homebuilder sentiment, weak single-family housing starts, a plunge in building permits and deteriorating affordability elevate concerns that housing may be sending a negative economic signal. But she adds that trends in household formations and residential investment as a share of GDP suggest there may be more room to run.

Treasuries finished higher, with the yield on the 2-year note moving 2 bp lower to 2.82%, while the yields on the 10-year note and the 30-year bond declined 4 bps to 3.06% and 3.19%, respectively.

Tomorrow’s economic calendar will be busy, with a slew of reports coming out before the opening bell, including weekly initial jobless claims, forecasted to rise by 1,000 to 210,000; the advance goods trade balance, expected to show the deficit narrowed to $70.6 billion during August; the final read (of three) on Q2 Gross Domestic Product, with economists projecting no change to the prior revision of a 4.2% quarter-over-quarter annualized rate of growth, nor to personal consumption and inflation figures; pending home sales for August, predicted to have fallen 0.5%; while wholesale inventories, durable goods orders and the Kansas City Fed Manufacturing Index will round out the docket.

Europe and Asia ahead of Fed decision

European equities finished mostly higher, with the euro and British pound seeing modest pressure versus the U.S. dollar and the U.S. markets moving higher despite today’s Fed monetary policy decision, which is expected to deliver another rate hike. Bond yields in the region were mostly lower ahead of the Fed’s decision, while Italian fiscal concerns remained as the nation is set to present its budget and economic projections tomorrow, and U.K. Brexit tensions continued to fester.

French consumer confidence for this month came in below estimates. However, energy issues retreated modestly following a recent rally as crude oil prices cooled off from a run as of late on tightening supply worries.

Stocks in Asia finished mostly higher despite lingering trade concerns as U.S. President Donald Trump reiterated his stern stance on trade to the United Nations General Assembly and as the Fed was expected to deliver another rate increase today. Japanese equities overcame early losses and finished higher, with the yen choppy ahead of the monetary policy decision out of the U.S., while Australian securities also saw a modest gain.

Chinese stocks led to the upside, with stocks in Hong Kong rising in a return to action following yesterday’s holiday and those on the mainland also advancing nicely, showing some resiliency in the face of the festering trade concerns. However, markets in India declined, remaining choppy amid lingering banking system uneasiness, continued skittishness in the wake of the recent weakness in the rupee, and as concerns remain regarding emerging markets.

Fed Moves Rates Higher

The Federal Reserve voted unanimously to lift a key U.S. interest rate by a quarter point, but the central bank is sticking to its gradualist strategy of raising the cost of borrowing.

The Fed predicts one more rate hike by December and three more in 2019, unchanged from its prior forecast.

After a two-day meeting, the Fed on Wednesday raised its short-term fed funds rate to a range of 2% to 2.25%, marking the highest level in a decade.

In a surprising twist, though, the Fed dropped longstanding language from its policy statement saying its monetary policy “remains accommodative.”

The removal of that phrase suggests the Fed could even pause at some point to assess the effect of is actions on the economy. The FOMC boosted its forecast for U.S. growth in 2018 to 3.1% from 2.8%, but it expects GDP to eventually slow to as low as 1.8% by 2021.

Market Insights 9/25/2018

U.S. equities were unable to achieve a late-day attempt to close in the green, instead finishing mixed amid continued trade concerns and caution ahead of tomorrow’s highly-expected Fed rate hike.

Treasury yields moved higher and the U.S. dollar dipped following an 18-year high in Consumer Confidence and record regional manufacturing growth, while crude oil prices extended a rally and gold finished higher.

The Markets…

The Dow Jones Industrial Average fell 70 points (0.3%) to 26,492

The S&P 500 Index was down 4 points (0.1%) to 2,916

The Nasdaq Composite rose 14 points (0.2%) to 8,007

In moderate volume 830 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.20 higher to $72.28 per barrel and wholesale gasoline was up $0.02 to $2.06 per gallon

The Bloomberg gold spot price rose $2.75 to $1,201.78 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—ticked 0.1% lower to 94.13

Consumer Confidence jumps to 18-year high as Fed begins meeting

The Consumer Confidence Index rose to 138.4 in September—the highest since September 2000—from August’s upwardly-revised 134.7, and versus the Bloomberg estimate of 132.1. The Present Situation Index and the Expectations Index of business conditions for the next six months both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—rose to 32.5 from the 30.2 level posted in August.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.9% year-over-year gain in home prices in July, versus forecasts of a 6.2% rise. Month-over-month, home prices were up 0.1% on a seasonally adjusted basis for July, matching expectations.

The Richmond Fed Manufacturing Activity Index for September unexpectedly improved to an all-time high of 29 from August’s level of 24, and versus estimates calling for a decline to 20. A reading above zero depicts expansion.

The upbeat consumer confidence and manufacturing reports come as the Federal Open Market Committee (FOMC) began its two-day monetary policy meeting and is highly-expected to conclude tomorrow with another rate hike. However, the accompanying statement and economic projections, as well as the subsequent press conference from Chairman Jerome Powell, are likely to face intense scrutiny. The markets are a bit less certain of a December rate increase, as cooler-than-expected August inflation data has countered signs that wage growth is picking up, while an escalation in global trade tensions may curb the Fed’s appetite and/or need to aggressively tighten policy.

In our opinion, the likelihood of a December rate increase could ebb and flow depending on incoming economic data between now and then. We are only now getting to a positive real rate on the short end of the curve, so it’s appropriate to continue to cheer still-fairly loose financial conditions; but with the tightness in the labor market and the Fed also shrinking its balance sheet, inflation could pick up further from here, causing some volatility to return to the markets.

Treasuries lost modest ground, as the yield on the 2-year note was little changed at 2.83%, while the yields on the 10-year note and the 30-year bond ticked 1 basis point higher to 3.10% and 3.23%, respectively.

Aside from tomorrow’s Fed decision, other items on the economic calendar that may garner attention include new home sales, forecasted to have increased 0.5% m/m in August to an annual rate of 630,000 following July’s decline, as well as MBA Mortgage Applications.

Europe higher as energy stocks lead, Asia mixed on trade concerns amid light volume

European equities finished mostly higher, despite further strength in the euro and British pound versus the U.S. dollar ahead of tomorrow’s monetary policy decision out of the U.S. Energy stocks led to the upside as crude oil prices extended a recent rally that has come amid global concerns about tightening oil supplies which have been exacerbated by the Iranian sanctions.

Italian markets traded decisively higher following reports that the nation’s political leaders may have reached a budget deficit compromise. Bond yields in the region were mostly higher, but Italian rates saw pressure as the reports appeared to ease budget concerns. U.K. Brexit uncertainty also continued to linger as Prime Minister Theresa May’s plan has come under heavy scrutiny as a deadline nears. In other economic news in the region, France reported mixed September business and manufacturing confidence reports.

Stocks in Asia finished mixed, with mainland Chinese markets declining in their return to action following yesterday’s holiday when further tariffs between the U.S. and China began. Australian equities finished little changed, despite strength in energy issues amid the rally in crude oil prices on tightening supply concerns.

Japanese securities rose modestly, also returning from yesterday’s holiday break to extend a recent run, aided by some weakness in the yen, and markets in India finished higher, rebounding from a recent soft patch that has seen a flare-up in banking system and liquidity concerns join skittish sentiment toward the emerging markets.

Volume remained subdued as South Korea remained closed for a holiday and Hong Kong also took the day off.

Market Insights 9/24/2018

U.S. equities finished the first trading session of the week mixed after rallying to record highs last week, amid lingering trade concerns with further tariffs between China and the U.S. going into effect.

Treasury yields ticked higher and the U.S. dollar was nearly unchanged, while crude oil prices rallied on supply worries and gold dipped.

The Markets…

The Dow Jones Industrial Average fell 181 points (0.7%) to 26,562

The S&P 500 Index was down 10 points (0.4%) to 2,919

The Nasdaq Composite rose 6 points (0.1%) to 7,993

In moderate volume 853 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil rose $1.30 to $72.08 per barrel and wholesale gasoline was $0.04 higher at $2.04 per gallon

The Bloomberg gold spot price ticked $0.48 lower to $1,999.56 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 94.21

Regional manufacturing unexpectedly dips to kick off heavy week headlined by Fed decision

The Dallas Fed Manufacturing Activity Index declined to 28.1 in September from August’s unrevised 30.9 level and versus the Bloomberg forecast of 31.0, with a reading above zero denoting expansion.

Treasuries dipped, as the yield on the 2-year note was flat at 2.81%, while the yields on the 10-year note and the 30-year bond ticked 1 basis point (bp) higher to 3.08% and 3.22%, respectively.

Today’s report begins the economic week that will likely be headlined by Wednesday’s monetary policy decision from the Federal Open Market Committee (FOMC). A solid economic foundation has the probability of a Fed rate hike near 100%, but the accompanying statement and economic projections, as well as the subsequent press conference from Chairman Jerome Powell, are likely to face intense scrutiny. The markets are a bit less certain of a December rate increase, as cooler-than-expected August inflation data has countered signs that wage growth is picking up, while an escalation in global trade tensions may curb the Fed’s appetite and/or need to aggressively tighten policy.

Tomorrow’s economic calendar will offer Consumer Confidence, expected to show a slight decline for September to a level of 132.0 from August’s record high of 133.4, as well as the Richmond Fed Manufacturing Index, forecasted to decline to 20 for September from the 24 posted the month prior. Housing data is on deck, courtesy of the S&P CoreLogic Case-Shiller Home Price Index, with economists projecting the 20-city composite to have risen 6.2% y/y, and 0.1% on a monthly and seasonally-adjusted basis.

Europe and Asia lower ahead of Fed decision and amid festering trade uneasiness

European equities finished lower, with the global markets looking a bit cautious ahead of this week’s monetary policy decision from the Fed, while trade concerns lingered as last week’s announced further tariffs between U.S. and China went into effect. As well, comments from European Central Bank President Mario Draghi pressured sentiment, as Draghi indicated that he sees a “relatively vigorous” pickup in underlying inflation within the euro-area, adding to the notion the Central Bank could begin tightening monetary policy next year.

The euro was higher versus the U.S. dollar, but the British pound rallied amid escalating Brexit uncertainty following reports that the British opposition party may be looking for a second Brexit referendum, while the U.K. government denied reports that it was planning to call a snap election. The markets were lower despite some M&A announcements with companies on both sides of the pond and as German business confidence came in above expectations for September.

Stocks in Asia finished lower to begin the week, as lingering global trade uneasiness remained, with further tariffs between the U.S. and China announced last week going into effect, while reports are suggesting China has called off trade talks with the U.S. Also, the global markets appear a bit cautious ahead of this week’s monetary policy decision out of the U.S., which is highly-expected to conclude with a rate hike.

Stocks in Australia dipped and those traded in Hong Kong fell sharply, while markets in India also dropped, as flared-up banking system and liquidity concerns joined already skittish sentiment toward emerging markets.

Volume was lighter than usual as markets in mainland China, South Korea and Japan were closed for holidays.

Random Thoughts

Despite a rise in 10-year yield above the 3% threshold ahead of the upcoming FOMC meeting, last week was marked by record highs in the large-cap benchmarks.

The DJIA racked up its 13th of the year, while the S&P 500 notched its 19th. Even the S&P Equal Weight 500 joined in the fun, securing its 16th new high. However, mid- and small-cap stocks, along with the tech-heavy Nasdaq, did not follow suit.

Last week’s action could be the result of investors rotating out of bonds ahead of this week’s anticipated rate hike, along with the trading out of previously outperforming sectors and sizes in favor of the lagging large caps.

Even though the Fed should raise rates this week and once again in December, history reminds us that no bear market in more than 60 years ever started with the difference between Fed funds and inflation this narrow. Indeed, just before all bear markets since 1955, the Fed funds rate was higher than the y/y change in headline CPI by an average of 2.5 percentage points.

After this week’s rate hike, the Fed funds target range will still be lower than the most recent CPI reading. What’s more, despite next year’s forecast for three additional rate hikes, the FF/CPI difference will remain below the narrowest difference recorded before the start of any bear market. As a result, WT Wealth Management does not believe the rise in near-term rates will be the cause of the next bear market.

Market Insights 9/21/2018

U.S. equities finished out the week mixed, with the Dow and S&P 500 again at or near record highs, and the Nasdaq seeing pressure amid renewed scrutiny toward tech stocks.

Trade concerns continued to cool to add to the buoyancy, but investors may be looking ahead to changes to the Global Industry Classification Standard’s sectors coming.

Treasury yields were mixed and the U.S. dollar rebounded from a recent bout of weakness, as reports from Markit on business activity diverged.

Crude oil prices were mixed and gold was lower.

The Markets…

The Dow Jones Industrial Average (DJIA) rose 87 points (0.3%) higher to 26,744

The S&P 500 Index was up nearly 2 points (0.1%) to 2,930

The Nasdaq Composite lost 41 points (0.5%) to 7,987

In heavy volume, as a result of quadruple witching—the simultaneous expiration of stock and index futures and options contracts—2.6 billion shares were traded on the NYSE and 3.6 billion shares changed hands on the Nasdaq

WTI crude oil rose $0.46 to $70.78 per barrel and wholesale gasoline was unchanged at $2.00 per gallon

The Bloomberg gold spot price fell $8.20 to $1,998.98 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.3% higher at 94.21

Markets were mixed for the week, as the DJIA rallied 2.3%, the S&P 500 Index rose 0.8%, while the Nasdaq Composite declined 0.3%

September business activity reports mixed

The preliminary Markit U.S. Manufacturing PMI Index showed expansion in output accelerated more than expected, rising to 55.6 in September from August’s 54.7 figure, and compared to the Bloomberg estimate calling for a slight rise to 55.0. However, the preliminary Markit U.S. Services PMI Index showed growth for the key U.S. sector unexpectedly slowed, decreasing to 52.9 from August’s 54.8 figure, versus expectations to nudge higher to 55.0. Readings above 50 for both indexes denote expansion.

Treasuries were mixed, as the yield on the 2-year note rose 1 basis point to 2.81%, while the yields on the 10-year note and the 30-year bond moved 1 bp lower to 3.06% and 3.20%, respectively.

Treasury yields extended a recent run that has been bolstered by the backdrop of continued solid economic data, which has kept expectations of a Fed rate hike next week almost a certainty, while the U.S. dollar has recovered from a drop as of late that has come courtesy of trade concerns being held in check.

Europe and Asia higher following record highs in the U.S.

European equities finished mostly higher to close out a solid weekly gain, as U.S. markets continued to rally to fresh record highs and following a solid advance in Asia. The lack of an escalation in trade concerns between the U.S. and China appeared to continue to buoy conviction, while materials issues led the advance.

The euro dipped versus the U.S. dollar, while the British pound fell sharply amid festering Brexit uncertainty. The Brexit uneasiness remained as U.K. Prime Minister Theresa May said that talks regarding the region’s exit from the European Union (EU) are at an impasse after EU leaders rejected her plan yesterday at a summit in Austria this week. May reiterated that no deal is better than a bad deal and that the U.K. must and will continue to prepare for a no-deal outcome.

Bond yields in the region finished mostly lower, while Markit’s read on Eurozone business activity in the manufacturing and services sectors showed growth was a bit smaller than expected for September.

Stocks in Asia finished mostly higher on the heels of yesterday’s move back to record highs in the U.S. that has come courtesy of the lack of an escalation in trade tensions after China and the U.S. exchanged more tariffs with rates that were below what had been initially feared. Japanese equities gained ground, extending a recent run with the yen losing some ground following an in line increase in the nation’s core consumer price inflation, while a separate report showed the nation’s manufacturing growth accelerated this month.

Chinese stocks and those traded in Hong Kong rallied amid the tempered trade concerns, and as the government announced measures to try to boost consumption. Markets in South Korea and Australia moved higher as well, but Indian listings dropped in their return to action following yesterday’s holiday amid continued skittishness, despite the recent fall in the U.S. dollar. Recent pressure on India’s currency and lingering uneasiness toward the emerging markets were met with flared-up worries toward the nation’s financial sector.

WEEKLY RECAP: Dow and S&P 500, weekly gain back to fresh record highs

The Dow and S&P 500 rallied on the week, posting fresh record highs, despite an escalation in trade tensions between China and the U.S. as they traded more tariffs. However, the markets appeared to react positively as both tariff rates were less than originally feared.

Materials and industrial s registered solid gains on the relative trade optimism, and the U.S. dollar fell to continue a recent soft patch to help the technology sector nudge higher despite lingering scrutiny of the sector. Financials led to the upside as Treasury yields rallied, with the 10-year note rate breaching the 3.00% mark.

Energy issues were also noticeably higher as crude oil prices rallied for a second-straight week in the wake of hurricane Florence’s landfall in the east coast, the greenback’s weakness, another drop in crude oil inventories and Iranian sanctions. Housing data dominated the economic calendar, with homebuilder sentiment and housing starts topping forecasts, and existing home sales stemming a monthly losing streak, while building permits surprisingly fell. Other reports showed economic output remained solid, as Leading Indicators continued to rise and regional manufacturing activity remained solidly in expansion territory.

The solid economic foundation has the probability of a Fed rate hike next week near 100%, but the accompanying statement and economic projections, as well as the subsequent press conference from Chairman Jerome Powell, are likely to face intense scrutiny. The markets are a bit less certain of a December rate increase, as cooler-than-expected August inflation data has countered signs that wage growth is picking up, while an escalation in global trade tensions may curb the Fed’s appetite and/or need to aggressively tighten policy.

The likelihood of a December rate increase could ebb and flow depending on incoming economic data between now and then. We are only now getting to a positive real rate on the short end of the curve, so it’s appropriate to continue to cheer still-fairly loose financial conditions; but with the tightness in the labor market and the Fed also shrinking its balance sheet, inflation could pick up further from here, causing some volatility to return to the markets.

Lastly, the Fed is poised to garner the most attention next week, other economic reports due that could be market catalysts include: Consumer Confidence, new home sales, preliminary durable goods orders, the final revision of Q2 GDP, personal income and spending, and the final University of Michigan Consumer Sentiment Index.

Random Thoughts

Trade has dominated the news this week as the Trump administration announced plans to put 10% tariffs on $200 billion of goods from China beginning next Monday, with the rate increasing to 25% on January 1.

China retaliated with $60 billion in tariffs on U.S. goods. Despite this escalation in trade tensions, markets around the globe mostly reacted positively. The Dow Jones Industrial average has gained more than 250 points, or nearly 1% since Friday’s close, and the S&P 500 industrials sector is also up almost 1% point.

Perhaps investors view the decline in the Chinese yuan, which is 5% lower year-to-date (vs. the U.S. dollar), as an offset to the tariffs.

Additionally, the strength in the U.S. consumer and domestic economic environment is often viewed as a cushion to counterbalance some of the tariff impact. We continue to prefer trade issues be resolved sooner rather than later so certainty can return to the market.