Economic Data Watch and Market Outlook
Three pillars of the wall of worry heading into 2019 came crashing down during a historical week. Beginning with trade, after a long two-year dispute, the U.S. and China agreed to a “Phase One” deal, which has the U.S. delay the imposition of 15.0% tariffs on $165 billion of Chinese imports that were scheduled for December 15th. The U.S. also agreed to reduce from 15.0% to 7.5% tariffs placed on $120 billion of imports imposed on September 1st. Beijing has agreed to increase the purchase of agricultural goods to $40 billion per year, plus other U.S. goods totaling $200 billion over two years. China also approved provisions to protect “intellectual property” and to open their financial markets to U.S. companies. In the UK, Prime Minister Boris Johnson won a landslide victory ensuring “Brexit” shall take place at the end of January 2020, essentially 3 ½ years after the initial “Brexit” vote took place. And the U.S. Fed has communicated interest rates should remain on hold through 2020.
As we enter next week’s trading sessions, U.S. equity markets hover near all-time highs and momentum indicators remain positive. Markets attempted breaking out to new highs, particularly after the news of a “Phase One” trade deal but failed. This may have been due to the investor dictum of buy on the rumor and sell on the news. The market has rallied strongly since President Trump announced a possible trade deal on November 11th, with the S&P 500 gaining approximately 7.8%. Better than expected corporate earnings season, coupled with a strong end of December positive price trend for equity markets, should provide for an upside bias.
In turning to next week’s economic calendar, we will see if the continued decline in mortgage rates will continue to have a positive impact on the U.S. housing market and we will get an update on the state of the U.S. consumer. We start the week off with the NAHB Housing market Index which is projected to rise from 70 in November to 71 in December. The index has improved this year, along with several other housing indicators which underlies the strength in the housing market.
On Tuesday we get the release of Industrial Production which is estimated to have increased by 1.2% in November. Manufacturing had declined in recent months due the United Auto Workers strike, but with the end of the strike in late October, a surge is expected in auto production which is projected to jump by 15.8%. Expectations are also for manufacturing outside of autos to improve, with a 0.3% gain in output. Also, on Tuesday Housing Starts are projected to increase by 2.4% to 1.345 million units in November.
Existing home sales out on Thursday, is expected to decline 1.1% to 5.40 million units in November. Existing home sales have firmed since early in the year during a time when many housing indicators have improved. But the rising trend for sales has been uneven across months, and we look for some cooling in the November data based in part on recent softening in the pending home sales index.
We close the week with the Personal Income and Spending report where real consumer spending is expected to increase of 0.3% in November. Even though the November retail sales data were soft, there are signs pointing to a jump in auto sales and in utilities spending during the month. In terms of the PCE price data, expectations are for an increase of 0.1% in November to 1.4%. The core PCE price index is expected to rise by 0.11% to a still muted 1.5% annual rate, still below the FOMC 2.0% inflation target. Finally, the University of Michigan consumer sentiment index to be revised up from 99.2 to 99.5, a 2.7pt increase over the final November reading.
The Week In Review
U.S. Equities
U.S. equity markets saw the S&P500 and NASDAQ post record closes, as President Trump and China trade officials announced an agreement for a “Phase One” trade deal and a reduction of tariffs as well.
a) Dow Jones +0.49%, MTD +0.43%, YTD +23.57 b) S&P 500 +0.77%, MTD +0.98%, YTD +28.89% c) Russell 2000 +0.30%, MTD +0.90%, YTD +23.10%
Drivers: I) U.S. and China agreed in principal on a “Phase One” trade deal which calls for additional purchases of agricultural and other products from American farmers and manufacturers. In return, the deal calls for the U.S. to delay of a new round of tariffs that were to be implemented on Sunday, December 15th, as well as the roll back of tariffs imposed last September 1st. Phase Two of the negotiations will involve the contentious issue requiring U.S. businesses to share their technology to work in China and the state subsidies provided to the SOE’s.
II) At the December FOMC meeting last week, the Fed kept rates unchanged after reducing the fed funds rate by 0.75% this year. The target range for the fed funds rate remained at 1.5% to 1.75%, which was widely expected. The Fed added that monetary policy as appropriate to support the expansion. The updated dot plot showed that the Fed anticipates rates will be unchanged in 2020 before slowly rising in 2021 and 2022.
III) The Consumer Price Index rose 0.3% in November which was just above the consensus estimate of a 0.2% gain. Food prices rose 0.1%, while energy gained 0.8%. Excluding food and energy, the CPI rose 0.2%, and this was below the Street’s forecast. The modest gain in the CPI should keep the Federal Reserve on hold for the foreseeable future, as inflation will need to run hotter than the 2.0% target before any rate hike considerations.
IV) Retail sales in November grew by a modest 0.2% supported by strong auto sales. Excluding autos, growth rose by only 0.1% versus the o.3% growth seen in October. Growth was mixed across segments with strength led by non-store retailers, gasoline stations, and electronics and appliance stores. Sales were 3.3% higher from a year-ago level, while core sales were also up 3.3% from last year.
V) Equities in December are higher with Small-Cap, Value, Energy and Financials leading equity price performance. The laggards for the month are Mid-Cap, Growth, REITs and Industrials.
Capitalization: Large Caps +0.83% (YTD +28.80%), Mid-Caps +0.35%(YTD +28.06%) and Small Caps +0.90% (YTD +23.10). Style: Value +1.29% (YTD +23.42%) and Growth +0.47% (YTD +22.06%). Industry Groups: Technology +1.59% (YTD +45.83%), Information Technology +1.59% (YTD 45.62%), Financials +1.85% (YTD +30.82%), Industrials -0.32% (YTD +28.78%), Consumer Staples +1.30% (YTD +25.98%), Communication Services -0.21% (YTD +24.76%), Consumer Discretionary +0.63% (YTD +25.68%), REITs -2.62% (YTD +23.83%), Utilities +0.56%(YTD +22.57%), Materials +0.72%(YTD +21.44%), Healthcare +1.40% (YTD +18.11) and Energy +2.49% (YTD +8.00%).
European Equities
The MSCI Europe index rose last week by +1.92% as the UK’s Conservative Party won a landslide victory in last Thursday’s election and the US and China agreed to a “Phase One” trade deal.
Drivers: I) The ECB kept its main policy rates unchanged during its December meeting. This was a quiet meeting following the major policy changed enacted in September, when the bank cut the deposit rate to -0.5% and announced a new program of quantitative easing which includes bond buying. New President Christine Lagarde is expected to maintain a dovish stance, and rates should remain steady barring an economic disaster.
II) Euro zone industrial production followed the 0.1% decline in September, with a disappointing drop of 0.5% in October. The main culprit in the decline was a 2.0% plunge in capital goods production, though the category had seen a cumulative 3.9% increase since July. Energy production also fell, as temperatures in October remained above their seasonal norms and depressed demand for heating.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +1.92% for the week (MTD +2.08%, YTD +21.59%).
Asian Equities
Asian equity markets rallied strongly following the completion of the “Phase One” agreement between the U.S. and China. The Dow Jones Asia Index advanced by +3.45% for the week, (MTD +3.80%, YTD +10.23%).
Drivers: I) China’s Consumer Price Index jumped by 4.5% year over year in November, exceeding estimates, and up from 3.8% in October. The CPI rise was again a result of the African swine flu that has caused pork prices to more than double in a year. China is attempting to ease the pressure on food prices by increasing the purchase of agricultural goods and pork, particularly from the U.S. However, if you exclude food prices, inflation remains subdued at 1% year over year as general demand is still experiencing underlying weakness.
II) Japan’s real GDP grew 0.4% in the third quarter, after being revised upward from the preliminary estimate of 0.1%. While private consumption expenditure grew at 0.5% quarter over quarter, nonresidential investment expenditure growth accelerated, rising by 1.8%. Overall, third-quarter growth was stronger than expected, led by a significant increase in capital expenditure.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +2.86% (MTD +3.13%, YTD +22.38%), the Hang Seng Index rose by +4.84% (MTD +5.42%, YTD +7.52%) and the Shanghai Composite gained +1.91% (MTD +3.33%, YTD +19.00%).
Fixed Income
Treasury yields fell last week as global geo-political risks abate with the resolution of the UK elections and the U.S. and China “Phase One” trade negotiations.
Performance: I) The 10-year Treasury yield was lower last week ending at 1.827% down from 1.841%. The 30-year yield fell last week finishing at 2.260 dropping from 2.280%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.29% last week, MTD +0.07% and YTD +8.87%. The Bloomberg Barclays US MBS TR was higher by +0.17% last week, MTD +0.13% and YTD +6.20%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.76%, MTD +1.11% and YTD +13.33%.
Commodities
The DJ Commodity Index rallied strongly last week gaining 1.55% and is higher month to date +3.48% (YTD+8.13%). Commodity prices rose as completion of the “Phase One” U.S./China trade deal drove energy and industrial metals higher.
Performance: I) The price of oil rallied +1.20% last weekclosing at $59.78 and has risen month to date in December by +7.87% (YTD +31.64%). Oil rose on the positive resolution of the U.S./China trade deal.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -0.51 ending at 97.18 for the week (MTD -1.11%, YTD +1.05%). The USD fell last week as geo-political uncertainty abated due to the completion of the U.S./China “Phase One” deal and pro-Brexit result from the UK election.
III) Gold advanced last week due to a fall in interest rates and the USD. Gold was higher by +1.07% last week, climbing to $1480.3 (MTD +0.67%, YTD +15.53%).
Hedge Funds
Hedge fund returns in December are mostly higher for the month with core strategies, Equity Hedge, Event Driven, Relative Value and Multi-Strategy in positive territory. Macro is down for the month.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.38% MTD and up +7.73% YTD.
- Equity Hedge has risen by +0.79% MTD and is up +10.24% YTD.
- Event Driven is higher MTD +0.50% and is higher YTD +8.31%.
- Macro/CTA has fallen by -0.32% MTD and is up +4.19% YTD.
- Relative Value Arbitrage has advanced by +0.29% and is up +5.80% YTD.
- Multi-Strategy is up MTD at +0.31% and is higher by +5.48% YTD.
Data Source: Haver Economics
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