Monthly Archives: February 2019

Market Insights 2/28/2019

U.S. equities finished lower, as a stronger-than-expected Q4 GDP report was overshadowed by more discouraging Chinese manufacturing data.

Treasury yields finished higher following the domestic output report while crude oil prices were mixed, gold declined and the U.S. dollar was nearly unchanged.

The Markets…

The Dow Jones Industrial Average declined 69 points (0.3%) to 25,916

The S&P 500 Index dipped 8 points (0.3%) to 2,784

The Nasdaq Composite decreased 22 points (0.3%) to 7,533

In heavy volume, 1.3 billion shares were traded on the NYSE and 2.6 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.28 to $57.22 per barrel and wholesale gasoline was down $0.01 to $1.75 per gallon

The Bloomberg gold spot price traded $5.96 lower to $1,313.90 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—rose 0.2% at 96.18

Q4 GDP growth tops forecasts

The first look (of two) at Q4 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of expansion of 2.6%, after the unrevised 3.4% expansion in Q3, and north of the 2.2% growth forecasted by Bloomberg. Personal consumption gained 2.8%, below forecasts of a 3.0% rise, and following the unadjusted 3.5% increase recorded in Q3. The report was delayed due to the government shutdown and combines the advance and secondary estimates.

On inflation, the GDP Price Index came in at a 1.8% rise, above expectations of a 1.7% gain and matching the unrevised increase seen in Q3, while the core PCE Index, which excludes food and energy, moved 1.7% higher, north of expectations to match the unadjusted 1.6% advance in Q3.

Treasuries were lower, as the yields on the 2-year note and the 30-year bond rose 2 basis points (bps) to 2.52% and 3.08%, respectively, while the yield on the 10-year note was 4 bps higher at 2.72%. Bond yields added to a weekly gain, while the U.S. dollar reversed course and was flat on the data and in the wake of this week’s Congressional monetary policy testimony by Fed Chairman Jerome Powell, in which he reiterated the Central Bank’s recent pivot to a more dovish stance.

Weekly initial jobless claims rose by 8,000 to 225,000, versus forecasts calling for an increase to 220,000, with the prior week’s figure being upwardly-revised to 217,000. The four-week moving average fell by 7,000 to 229,000, while continuing claims rose by 79,000 to 1,805,000, north of estimates of 1,737,000.

Europe mixed, Asia lower on data and flared-up geopolitical concerns

European equities finished mixed, with a stronger-than-expected U.S. Q4 GDP report being countered by another dose of disappointing Chinese manufacturing data, while geopolitical concerns flared up after the U.S. and North Korean summit was cut short without a deal.

U.K. Brexit concerns persisted, with a series of Parliamentary votes over the next two weeks on a no-deal Brexit and extending the divorce deadline looming. German consumer price inflation for February came in a bit hotter than expected, while French consumer spending also rose more than anticipated in January. The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly higher.

Asian stocks finished mostly lower, with South Korea’s market leading the way, after a summit between the U.S. and North Korea was cut short without a deal. Japanese equities dropped, with the yen trimming a recent decline even as data showed the nation’s industrial production and retail sales both fell more than expected in January.

Shares traded in mainland China and Hong Kong declined after the country’s official Manufacturing PMI Index showed contraction for the third-straight month and a three-year low in February as export orders declined further amid the ongoing trade dispute with the U.S. However, the report showed new orders improved and a complementary read on the nation’s services sector output continued to show expansion.

Random Thoughts

Global equity markets continue to recover from the late December capitulation swoon.

Since prices frequently lead fundamentals, investors may now be anticipating the avoidance of a prolonged trade war with China and a hard Brexit. Some believe the outcome of a second Brexit resolution vote could end up calling the whole thing off.

As a result, 2019 full-year EPS growth estimates may reverse course from their YTD slide from +6.5% to the current +2.8%, while avoiding the classic definition of an EPS recession of two successive quarters of year-over-year EPS decline.

With the S&P 500’s multiple now slightly ahead of its long-term average, increased EPS growth expectations will likely be the catalyst needed to propel share prices further.

Market Insights 2/26/2019

U.S. stocks dipped slightly at the close as the markets underpinned by a sharp recovery in Consumer Confidence, a reiteration of patience by Fed Chairman Jerome Powell and mostly positive earnings results from the retail sector.

Treasury yields dipped and the U.S. dollar declined. Crude oil prices rose modestly after yesterday’s slump and gold ticked higher.

The Markets…

The Dow Jones Industrial Average (DJIA) traded 34 points lower (0.1%) to 26,058

The S&P 500 Index dipped 3 points (0.1%) to 2,793

The Nasdaq Composite declined 5 points (0.1%) to 7,549

In moderate volume, 867 million shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq

WTI crude oil increased $0.02 to $55.50 per barrel and wholesale gasoline was up $0.02 to $1.72 per gallon

The Bloomberg gold spot price traded $1.50 higher to $1,329.09 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% at 96.05

Consumer Confidence beats expectations, Fed Chair reiterates patience

The Consumer Confidence Index rose to 131.4 in February from January’s upwardly-revised 121.7 and above Bloomberg estimates of 124.9. The Present Situation Index and the Expectations Index of business conditions for the next six months both increased month-over-month, with the former hitting an 18-year high and the latter posting the largest monthly gain since 2011. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—ticked higher to 34.3 from the 34.1 level posted in January.

Housing starts for December fell 11.2% m/m to an annual pace of 1,078,000 units, below the forecast of 1,256,000 units. November starts were revised lower to an annual pace of 1,214,000. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, grew 0.3% m/m to an annual rate of 1,326,000, versus expectations of a 1,290,000 pace, and compared to November’s downwardly-revised 1,322,000 rate.

Treasuries ticked higher, with the yield on the 2-year note dipping 1 basis point (bp) to 2.48%, while the yields on the 10-year note and 30-year bond were down 2 bps to 2.64% and 3.01%, respectively.

The U.S. dollar saw some pressure amid a rally in the British pound and as the markets closely watched Fed Chairman Jerome Powell’s semi-annual Congressional monetary policy testimony, in front of the Senate Committee on Banking, Housing, and Urban Affairs. The Fed Chief shared expectations that economic growth would be “somewhat slower” this year, with slowing global growth a potential headwind, but inflation remains close to the Fed’s goal. The Chairman added that the Fed will be “patient” on future policy changes, while details of a balance sheet wind down could change in light of economic and financial developments.

Along with Fed Chairman Powell’s continued Congressional testimony in front of the House Financial Services Committee, tomorrow’s economic calendar will bring the releases of MBA mortgage applications, advance goods trade balance, wholesale inventories, pending home sales and December factory orders—a report that was delayed due to the government shutdown.

The Richmond Fed Manufacturing Activity Index for February increased to 16 from January’s level of -2, which surpassed estimates of 5. A reading of zero is the demarcation point between expansion and contraction.

Europe mostly rises during U.S. monetary policy testimony, Asia trims recent rally

European equities reversed mostly higher, with the global markets eyeing monetary policy testimony from U.S. Fed Chief Jerome Powell, who continued to stress that the Central Bank will remain patient, while global earnings and economic data was mixed. The markets also focused on trade ambiguity between the U.S. and China after the March deadline was recently extended. The euro ticked higher versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished lower following a recent rally, with investors looking for additional trade details after a U.S./China tariff truce was declared over the weekend, while the markets appeared to tread with some caution ahead of today’s monetary policy testimony from U.S. Fed Chief Powell. A number of structural issues remain before a full-fledged trade deal between Beijing and Washington can be finalized, with enforcement mechanisms on areas such as forced technology transfer and intellectual property protection still appearing to worry U.S. trade representatives.

North Korean leader Kim Jong Un arrived in Vietnam ahead of a summit with President Donald Trump, as the U.S. continues to lean on Beijing for a role in the denuclearization of the Korean peninsula. Chinese stocks pared some of yesterday’s solid advances that came on news of delayed U.S. tariff increases, while a ramping up of earnings season seemed to foster some caution. Japanese equities saw some pressure as the yen advanced versus the U.S. dollar, while Australian markets dropped amid some broad-based weakness, while energy shares pushed lower following Monday’s slump in crude oil prices.

Market Insights 2/25/2019

While well off the best levels of the day amid apparent caution ahead of Chairman Powell’s congressional testimony tomorrow, U.S. equities added to last week’s gains, getting a boost from continued optimism surrounding trade after President Donald Trump announced a U.S./China trade deadline extension.

Treasury yields were higher amid a light economic calendar that offered better-than-expected reads on wholesale inventories and regional manufacturing activity.

Gold, crude oil prices and the U.S. dollar were lower.

The Markets…

The Dow Jones Industrial Average rose 60 points (0.2%) to 26,091

The S&P 500 Index gained 3 points (0.1%) to 2,796

The Nasdaq Composite added 27 points (0.4%) to 7,554

In moderate volume, 895 million shares were traded on the NYSE and 2.3 billion shares changed hands on the Nasdaq

WTI crude oil declined $1.78 to $55.48 per barrel and wholesale gasoline was down $0.07 at $1.70 per gallon

The Bloomberg gold spot price declined $1.86 to $1,327.54 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 96.40

Manufacturing, wholesale inventories move higher

The Dallas Fed Manufacturing Activity Index showed growth expanded in January, increasing more than expected to 13.1 from January’s unrevised 1.0 level, versus expectations of 4.7, with a reading of zero the demarcation point between expansion and contraction.

Wholesale inventories ascended to a 1.1% m/m rise while it was expected to rise to a 0.4% gain. November’s figure was revised upwards to a 0.4% increase from the preliminary report of a 0.3% rise. Sales were down 1.0% m/m, compared to November’s revised 1.2% decline. The inventory-to-sales ratio—the amount of time it would take to deplete inventories at the current sales pace—increased from November’s 1.30 months rate to 1.33.

Treasuries were lower, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all rose 2 basis points (bps) to 2.51%, 2.67% and 3.04%, respectively.

Tomorrow, the economic calendar will begin with the housing starts and building permits report, with starts anticipated to have fallen 0.2% m/m and permits to have declined 2.6% m/m during December, followed shortly thereafter by the S&P CoreLogic Case-Shiller Home Price Index, expected to show prices in the 20-city composite rose 4.5% year-over-year, as well posting a 0.3% increase m/m on a seasonally-adjusted basis.

The highlight of the day will likely be the Congressional monetary policy testimony by Fed Chairman Jerome Powell to the Senate Banking Committee.

Europe and Asia higher amid trade hopes

European equities finished mostly higher on the heels of a positive week in the U.S. and an announcement by President Trump that a March 1 U.S./China trade tariff deadline has been extended, but the gains were tempered as investors await this week’s monetary policy testimony from Fed Chief Jerome Powell which will begin tomorrow.

News of the planned deadline extension follows a lengthy period of high frequency engagement between Washington and Beijing toward some sort of settlement over trade frictions, as market participants appear optimistic that a deal will be reached.

The euro and British pound were higher versus the U.S. dollar, while bond yields in the region were mixed.

Stocks in Asia finished higher to kick off the week, following solid weekly gains in the U.S. and several tweets from President Trump announcing plans to delay a U.S./China March 1 trade tariff deadline, while the markets await the monetary policy testimony from U.S. Fed Chief Powell later this week. While tweets from President Trump reiterated “substantial progress” on trade talks between the world’s two largest economies, reports out of China cautioned that bilateral trade frictions are “long-term, complicated and arduous.”

Japanese equities rose, even as the yen gained some ground versus the U.S. dollar, and January’s Producer Price Index for services met expectations and December’s level.

Market Insights 2/22/2019

U.S. stocks posted another weekly advance, as Fed concerns remained calm and a meeting between President Trump and Chinese Vice Premier Liu concluded with positive comments regarding a potential trade deal, while Chinese officials extended their trip by two days to continue talks as the March deadline draws near.

Treasury yields gave back gains that followed Wednesday’s Fed minutes and the U.S. dollar dipped. Crude oil prices were higher despite yesterday’s fifth-straight weekly rise in inventories and gold moved upward.

The Markets…

The Dow Jones Industrial Average rose 181 points (0.7%) to 26,032

The S&P 500 Index gained 18 points (0.6%) to 2,793

The Nasdaq Composite added 68 points (0.9%) to 7,528

In moderate volume, 799 million shares were traded on the NYSE and 2.4 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.30 to $57.26 per barrel and wholesale gasoline was flat at $1.77 per gallon

The Bloomberg gold spot price grew $4.64 to $1,328.27 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—dipped 0.1% to 96.55

Markets were higher for the week, as the DJIA and the S&P 500 Index gained 0.6%, while the Nasdaq Composite advanced 0.7%

Bond yields fall after yesterday’s advance

Treasuries rallied as the economic calendar was void of any major releases, with the yields on the 2-year note and the 30-year bond falling 3 basis points to 2.50% and 3.02%, respectively, while the yield on the 10-year note dropped 4 bps to 2.65%.

Europe rises, Asia mixed on lingering trade optimism and data

European equities gained ground, with the markets digesting a diverging dose of earnings and economic data in the region, while treading with some caution as U.S./China trade talks near an important deadline. Technology and basic resources stocks led the upward move as hope seems to linger among market participants that a March tariff deadline between the world’s two largest economies may be extended.

In economic news, flat German Q4 GDP growth was unrevised to match estimates, along with Eurozone consumer price inflation figures for January. Also, German business sentiment dipped in February, but Bloomberg economists are pointing out that the “free-fall” may be coming to an end. The euro was little changed versus the U.S. dollar, while the British pound reversed higher. Bond yields in the region were mostly lower.

Stocks in Asia finished mixed after yesterday’s drop in the U.S. markets that came as a host of disappointing global economic data appeared to foster growth concerns and counter lingering U.S.-China trade optimism.

Chinese stocks gained ground to lead to the upside amid the lingering trade optimism as the latest round of U.S.-China trade talks, which have been categorized as mostly positive, is expected to culminate with a meeting today between President Donald Trump and Chinese Vice Premier Liu. South Korean equities ticked higher, while Indian stocks dipped. Japanese markets traded modestly lower amid the simmering global growth worries and as the yen was choppy versus the U.S. dollar and the nation’s January consumer price inflation rose in line with consensus numbers.

Stock rally into 2019 continues

U.S. stocks posted a weekly gain for a seventh time during the first eight weeks of 2019, with materials and utilities sectors leading markets higher, underpinned by U.S./China trade talk optimism and earnings season showing revenue beat rates roughly 59% and profit beat rates exceeding 70%, per data of the 447 S&P 500 companies that have reported thus far compiled by Bloomberg.

Although several reports showed signs of slowing earnings growth after last year’s tax law changes, guidance and renewed plans to return capital to shareholders preserved optimism as a more dovish Fed has indicated a pause in further rate hikes. Stocks showed resiliency in the face of a flare-up in global growth concerns as disappointing U.S. existing home sales, Index of Leading Economic Indicators, and capital spending data, was met with manufacturing reports that showed contractions for the Eurozone and Japan.

Treasury yields mostly dipped, after giving back a rebound that followed Wednesday’s Fed minutes, and the U.S. Dollar Index paused in a recent uptrend, while crude oil prices continued a rally as of late.

Next week, earnings season will continue with retail companies reporting, though the economic calendar will also be robust, with key releases of housing starts and building permits, personal income and spending, Consumer Confidence, factory orders, the first look (of two) at Q4 GDP, the ISM Manufacturing Index and the final University of Michigan Consumer Sentiment Index. However, the event that may go the longest way in shaping market direction could be the midweek Congressional monetary policy testimony by Fed Chairman Jerome Powell.

Market Insights 2/21/2019

U.S. equities finished lower, as optimism over trade in the wake of continued U.S.-China negotiations was met with a host of mixed domestic economic reports and soft data from overseas.

Treasury yields were higher following the data and the U.S. dollar gained modest ground, while crude oil prices were lower following the fifth-straight weekly rise in inventories, and gold lost ground.

The Markets…

The Dow Jones Industrial Average fell 104 points (0.4%) to 25,851

The S&P 500 Index declined 10 points (0.4%) to 2,775

The Nasdaq Composite decreased 29 points (0.4%) to 7,460

In moderate volume, 855 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.20 to $56.96 per barrel and wholesale gasoline was up $0.01 to $1.77 per gallon

The Bloomberg gold spot price declined $14.42 to $1,324.02 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% higher at 96.63

Markets had a host of mixed data to digest

The Conference Board’s Index of Leading Economic Indicators (LEI) for January dipped 0.1% month-over-month, versus Bloomberg projections to tick 0.1% higher and compared to December’s upwardly revised flat reading. ISM new orders, stock prices, and credit were the largest positive contributors, while jobless claims, average workweek and average consumer expectations were negative. .

The preliminary Markit U.S. Manufacturing PMI Index showed growth decelerated more than expected, declining to 53.7 in February, from January’s 54.9 figure, and versus estimates calling for a dip to 54.8. However, the preliminary Markit U.S. Services PMI Index showed growth was faster than expected for the key U.S. sector this month, rising to 56.2 from January’s 54.2 figure, versus expectations to nudge higher to 54.3. Readings above 50 for both indexes denote expansion.

Existing-home sales in January declined 1.2% m/m to an annual rate of 4.94 million units, compared to expectations to match December’s upwardly-revised 5.00 million rate. Sales of single-family homes were down m/m and were 8.4% below year-ago levels, while purchases of condominiums and co-ops were higher m/m but were down 9.5% y/y. The median existing-home price was up 2.8% y/y to $247,500. Unsold inventory came in at a 3.9-months pace at the current sales rate, up from 3.7 months a year ago. Sales declined in all regions except the Northeast, and all were below year ago levels.

Chief economist Lawrence Yun noted that, “Existing home sales in January were weak compared to historical norms; however, they are likely to have reached a cyclical low. Moderating home prices combined with gains in household income will boost housing affordability, bringing more buyers to the market in the coming months.”

Weekly initial jobless claims dropped by 23,000 to 216,000, versus forecasts calling for a decline to 228,000, with the prior week’s figure being unrevised at 239,000. The four-week moving average rose by 4,000 to 235,750, while continuing claims fell by 55,000 to 1,725,000, south of estimates of 1,743,000.

Treasuries finished lower following the mixed data, as the yield on the 2-year note rose 3 basis points (bps) to 2.52%, the yield on the 10-year note added 4 bps to 2.69%, and the 30-year bond rate advanced 5 bps to 3.05%.

Bond yields extended yesterday’s modest rise that came as the Fed released the minutes from its January monetary policy meeting in which it kept interest rates unchanged and made a noticeable pivot to a dovish stance. The report showed that, “Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook.” Those considerations included the recent softness in inflation, the government shutdown and the path of fiscal policy, while also mulling the impact that Fed policy tightening moves as well as the ongoing trade negotiations between the U.S. and China would have on the economy. The minutes also showed that Members agreed that financial conditions have tightened and that it sees softer business and consumer sentiment, while the outlook for foreign growth was weaker.

There are no reports slated for release on tomorrow’s economic calendar.

Europe and Asia mixed on trade and data

European equities finished mixed, with the global markets remaining optimistic regarding progress in U.S.-China trade talks, but yesterday’s Fed minutes out of the U.S. highlighted downside risks including softening global growth. Also, the markets digested some mixed economic reports in the U.S. today, while data on this side of the pond was on the softer side. Markit’s Eurozone Manufacturing PMI Index declined more than expected to a level depicting contraction (below 50), decreasing to 49.2 in February, from 50.5 in January, and versus estimates of a dip to 50.3. The read comes as the contraction in manufacturing output in Germany—Europe’s largest economy—unexpectedly accelerated in February.

Stocks in Asia finished mixed with continued reports of progress of the U.S.-China trade negotiations underpinning sentiment, while the markets digested some divergent economic data and the Fed’s minutes from its January meeting appeared to garner some caution as it highlighted downside risks to global growth. Japanese equities gained ground, with the yen choppy in the wake of reports showing the nation’s manufacturing output fell to a level depicting contraction this month and retail sales data that fell for January.

Stocks in mainland China declined, but those traded in Hong Kong advanced, getting a boost from positive earnings out of the tech sector. Australian securities rose on the heels of a stronger-than-expected January employment change report and as the Australian dollar fell on reports that China has banned the nation’s coal imports due to exacerbated tensions between the two countries including issues with cyber security. .

Fed Minutes

Federal Reserve officials widely favored ending the runoff of the central bank’s balance sheet this year while expressing uncertainty over whether they would raise interest rates again in 2019, minutes of their January meeting showed.

“Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year,” according to the record of the Federal Open Market Committee’s Jan. 29-30 gathering released Wednesday.

“Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet,” the minutes said, referring to the rolloff of assets from the balance sheet that began in late 2017. Launched as an emergency measure to protect the economy during the financial crisis, it has declined to about $4 trillion from a peak of $4.5 trillion in 2015.

The minutes also elaborated on the dovish message delivered three weeks ago when the FOMC said it will be “patient,” signaling it had put rate hikes on hold and was prepared to be more flexible on shrinking the balance sheet. The shift occurred after the worst December for U.S. stocks since the Great Depression, trade tensions escalated between the U.S. and China, and President Donald Trump berated officials for tightening monetary policy too much.

“Many participants observed that if uncertainty abated, the Committee would need to reassess the characterization of monetary policy as ‘patient’ and might then use different statement language,” the minutes noted.

Market Insights 2/20/2019

In choppy trading, U.S. equities finished higher, as optimism surrounding the start of another round of U.S./China trade talks and the afternoon release of the minutes from the Fed’s January monetary policy meeting was met with some caution over both to keep the gains in-check.

Treasury yields moved higher following the minutes, with a jump in mortgage applications having little impact, while the U.S. dollar was nearly flat, crude oil prices gained ground, and gold reversed to the downside.

The Markets…

The Dow Jones Industrial Average rose 63 points (0.2%) to 25,954

The S&P 500 Index rose 5 points (0.2%) to 2,785

The Nasdaq Composite inched 2 points higher to 7,489

In heavy volume, 933 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.74 to $57.16 per barrel and wholesale gasoline was up $0.04 to $1.60 per gallon

The Bloomberg gold spot price declined $2.18 to $1,338.76 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was nearly unchanged at 96.52

Mortgage applications rise, Fed minutes reiterate patience

The MBA Mortgage Application Index rose 3.6% last week, following the prior week’s revised 6.9% decrease. The increase came as a 6.4% ascension in the Refinance Index was met with a 1.7% rise for the Purchase Index. The average 30-year mortgage rate gained 1 basis point to 4.66%.

The Federal Reserve released the minutes from its January monetary policy meeting in which it kept interest rates unchanged. The report showed that, “Participants pointed to a variety of considerations that supported a patient approach to monetary policy at this juncture as an appropriate step in managing various risks and uncertainties in the outlook.” Those considerations included the recent softness in inflation, the government shutdown and the path of fiscal policy, while also mulling the impact that Fed policy tightening moves as well as the ongoing trade negotiations between the U.S. and China would have on the economy.

The minutes also showed that Members agreed that financial conditions have tightened and that it sees softer business and consumer sentiment, while the outlook for foreign growth was weaker. With regards to its balance sheet, “Almost all participants thought that it would be desirable to announce before too long a plan to stop reducing the Federal Reserve’s asset holdings later this year. Such an announcement would provide more certainty about the process for completing the normalization of the size of the Federal Reserve’s balance sheet.”

Treasuries were lower, as the yield on the 2-year and 10-year notes ticked 1 bp higher to 2.50% and 2.64%, respectively, while the 30-year bond rate increased 2 bps to 3.00%.

Tomorrow’s economic calendar will be robust, beginning with weekly initial jobless claims, anticipated to decline to 228,000 from the prior week’s 239,000, followed by the Philly Fed Manufacturing Index, with economists projecting a slight fall to a level of 14 for February, with a reading above zero denoting expansion in activity. The December read on durable goods orders is also on tap, with expectations of a 1.7% m/m increase following the 0.7% gain registered in November, while orders ex-autos are anticipated to have risen 0.3% m/m, and non-defense capital goods orders ex-aircraft are predicted to have moved 0.2% higher m/m.

Europe and Asia higher amid trade optimism

European equities finished higher following yesterday’s gains in the U.S., amid the start of another round of U.S./China trade negotiations and some mixed earnings and economic data. U.S. President Donald Trump indicated on Tuesday that he was open to shifting a current trade deadline with China, keeping investors optimistic about future positive announcements out of Washington. On the economic front, Germany’s Producer Price Index (PPI) jumped to a 0.4% m/m increase for January, from a 0.4% decline in December, and compared to the projected 0.1% decrease. Eurozone consumer confidence rose to -7.4, above consensus figures of -7.7, as cautious perspectives on the state of the region’s economic slump lingered.

European Central Bank (ECB) chief economist Peter Praet stated that central banks will soon discuss a new round of bank loans amid renewed investor concerns over how the ECB will respond to weakness in the continent’s economy. U.K. Prime Minister Theresa May and European Commission President Jean-Claude Juncker are meeting in Brussels today, as an Irish backstop portion of the current Brexit divorce agreement continues to be a sticking point for negotiators and the U.K. Parliament. The euro was higher and the British pound was flat versus the U.S. dollar following recent gains in the Chinese yuan and Australian dollar, while the markets awaited today’s release of the Fed meeting minutes this afternoon.

Stocks in Asia finished mostly higher, on the heels of yesterday’s gains in the U.S., as some flexibility in a trade truce deadline between the world’s two largest economies appeared to encourage market participants, as well as comments from U.S. President Trump that the current trade deadline with China is not a “magical date.”

Market Insights 2/19/2019

U.S. stocks overcame early pressure and finished modestly higher as caution appeared to resurface as U.S.-China trade talks resume and the Fed will release the minutes from its January monetary policy meeting tomorrow.

Treasury yields dipped and the U.S. dollar fell even as U.S. homebuilder sentiment improved more than expected this month. Crude oil prices finished mixed and gold gained ground.

The Markets…

The Dow Jones Industrial Average ticked 8 points higher to 25,891

The S&P 500 Index rose 4 points (0.2%) to 2,780

The Nasdaq Composite added 14 points (0.2%) to 7,487

In moderate volume, 839 million shares were traded on the NYSE and 2.1 billion shares changed hands on the Nasdaq

WTI crude oil advanced $0.47 to $56.45 per barrel and wholesale gasoline was off $0.01 to $1.57 per gallon

The Bloomberg gold spot price increased $13.98 to $1,340.87 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—fell 0.4% at 96.52

The sharp rebound in U.S. stocks since the Christmas Eve 2018 low has been a welcome development for the bulls, but we are concerned that the pendulum may have swung a bit too far. The fourth quarter 2018 earnings season has been healthy, but estimates for this year’s first quarter have descended into negative territory. Meanwhile, the Fed has turned more dovish; but why and for how long are relevant questions. Trade continues to be at the center of investors’ attention—the recent positive news from talks with China may be overplayed and there are other potential trade disputes simmering

Housing data above forecasts to begin the shortened week

The National Association of Home Builders (NAHB) Housing Market Index showed homebuilder sentiment this month ascended to 62 from January’s unrevised 58 level, compared to the Bloomberg expectation of a rise to 59. A level of 50 separates good and poor conditions. The NAHB noted that builder confidence levels moved up in tandem with growing consumer confidence and falling interest rates. The NAHB added that in the aftermath of the fall slowdown, many builders are reporting positive expectations for the spring selling season.

Treasuries were higher, with the yields on the 2-year and 10-year notes decreasing 2 basis points (bps) to 2.49% and 2.64%, respectively, while the 30-year bond rate dipped 1 bp to 2.98%. The U.S. dollar retreated after a recent strengthening that has garnered global market attention.

Tomorrow, the holiday-shortened week will continue with another read on the housing market in the form of MBA mortgage applications, which have fallen four-straight weeks. However, the headlining event could be the afternoon release of the minutes from the Fed’s January monetary policy meeting, which concluded with a more dovish statement to ease concerns about a potential policy mistake.

The markets will likely scrutinize the discussion details trying to gauge the pace of the balance sheet runoff that it signaled after the decision could be tweaked if future economic conditions were to warrant a more dovish monetary policy than can be achieved solely by reducing the federal funds rate.

Europe mostly lower following earnings, trade focus, Asia finishes mixed

European equity markets traded to the downside, with U.S.-China trade talks set to continue in Washington this week, while some disappointing earnings reports in the region hamstrung stocks. Higher level U.S./China trade negotiations are proceeding prior to a trade truce deadline at the beginning of March, while investors seemed to have a peripheral focus on possible U.S. tariffs that could be levied against European autos. Banking stocks were bogged down by a slide in shares of HSBC Holdings PLC after it announced profit figures that seemed to disappoint the markets, with analysts pointing to challenging capital market conditions and Brexit concerns.

The U.K.’s employment number hit a record high, while the unemployment rate remained at 4%, matching consensus figures. Outside the U.K., German investor confidence deteriorated more than expected, and Eurozone construction output declined in December. The British pound rallied and the euro nudged higher versus the U.S. dollar, while bond yields in the region were mostly lower.

Stocks in Asia finished mixed on the heels of Monday’s White House announcement of continued higher level U.S./China negotiations this week, with the markets awaiting the return to action for U.S. equities from yesterday’s holiday break.

Mainland Chinese stocks nudged higher and Hong Kong markets declined as investors appeared hesitant ahead of possible announcements on trade talk progress and as HSBC fell after it reported 2018 earnings that missed expectations. The trade discussions between Washington and Beijing proceed against a backdrop of cybersecurity fears, with the Chinese government claiming on Monday that the U.S. is trying to curtail its technology development as tensions around Huawei’s use of its gear for alleged spying festered.

Australian stocks finished higher amid some strength in technology and financial issues, while the markets digested the minutest from the Reserve Bank of Australia’s monetary policy meeting earlier this month, which concluded with a move to a more neutral stance and downgraded economic forecast. The report showed that falling property prices were a concern and threatening consumption, which could weigh on GDP growth, employment and inflation.

Japanese stocks nudged higher as the yen fell versus the U.S. dollar late in the session.

Random Thoughts

On our opinion, the S&P SmallCap 600’s Price Potential Rivals that of the MidCap 400

The S&P SmallCap 600 Index posted a 20-year compound annual growth rate (dividends included) of 9.9% versus 5.8% for the S&P 500. During that time, this U.S. small-cap equity index outpaced its large-cap brethren 55% of the time.

Yet small-cap stocks have fallen out of favor in the recent past, as the SC 600 beat the 500 in only one of the last five years.

Contrarian investors might now be wondering if the possibility of “reversion to the mean” awaits them in 2019. We think it does, based on relative price performance, EPS growth expectations and relative multiple.