ECONOMIC DATA WATCH AND MARKET OUTLOOK
The price action of risk assets last week, perhaps was an initial indication of the waning influence the U.S./China trade talks have over global markets. Since the announcement of a potential trade deal (have we heard this before) in October by President Trump and China trade officials, we still find ourselves determining whether the deal is on or off.
On Tuesday, President Trump announced that he maybe willing to wait till after the 2020 U.S. election to consummate a U.S./China trade deal. U.S. equity markets fell by 2.0%, but President Trump and Economic Adviser Larry Kudlow later in the week both said a trade deal was close which prompted a rebound in equity prices. Equity prices got a turbo boost at the end of the week as the U.S. jobs data blew past Street estimates, and the end of the earnings season saw 77.0% and 58.0% of companies beat their bottom-and-top line estimates. For the remainder of the year, it will be interesting to see if economic and fundamental data will have a greater impact on asset prices than President Trump’s tweets or tariff threats.
In turning to next week’s economic calendar, the key data releases will be U.S. CPI, PPI, retail sales and the interest rate outlook from the next FOMC meeting. On Wednesday we start with the release of the consumer price index which is projected to rise 0.2% in November (2.0% annually) while the ex. food-and energy core measure increased 0.21% (2.3% annually). Energy prices jumped in November, but the call is for a smaller gain during the month than the increase reported for October, with the energy CPI rising 0.4%.
The FOMC meeting on Wednesday is not expected to present any policy change, after the fed funds rate was cut for three consecutive meetings, by 0.25% to a target range of 1.5% to 1.75%. The cuts were widely expected, but last month’s statement from the Fed was less dovish with the exclusion of the words “act as appropriate” to sustain economic growth. The Fed will now be data dependent regarding any further rate action, as it will monitor incoming data as it “assesses the appropriate path” of interest rates.
US PPI data out on Thursday is expected to rise in November by 0.2% or 1.3% annually. The call is for energy and food prices to rise during the month, but moderate relative to the increases in October of 1.8% and 0.5% respectively.
Closing the week on Friday will be U.S. Retail sales which is expected to rise by 0.7% in November, versus the 0.3% post in October. The rise is projected to be driven by higher gasoline prices and a jump in auto sales. Specifically, the call is for a 0.8% increase in gas sales and a 1.8% increase in sales at motor vehicle and parts dealers.
THE WEEK IN REVIEW
U.S. EQUITIES
U.S. equity markets staged a strong rally at the end of the week as the U.S. jobs data easily beat Street estimates, while
U.S. and China officials stated trade talks were positively progressing.
a) Dow Jones -0.06%, MTD -0.06%, YTD +22.98 b) S&P 500 +0.21%, MTD +0.21%, YTD +27.90% c) Russell 2000 +0.59%, MTD +0.59%, YTD +22.73%
Drivers: I) U.S. equity markets suffered a broad decline on Tuesday following President Trump’s news conference at a NATO meeting in London, where he intimated there was “no deadline” to complete a trade deal with China. This negative news regarding the now nearly two-year long trade dispute, was somewhat refuted by Bloomberg’s report that any partial resolution on trade would be completed before the onset of the planned set on new China tariffs scheduled to be imposed on December 15th.
As we enter next week’s trading sessions, markets will begin to assess the odds of whether enough progress in the the U.S./China trade talks will delay the imposition of new U.S. tariffs scheduled for December 15 . If talks do not progress on a Phase One deal, the U.S. has readied a 15% tariff on an additional $156 billion of primarily consumer imports. Fundamentally, U.S. investors see an S&P 500 trading at a forward P/E multiple of 18.1 according to Yardeni Research. As U.S. equity prices rallied this year due to a P/E expansion, further upside going into 2020 will depend on a revival of positive corporate earnings growth. Consensus Street estimates have S&P 500 earnings growth in 2020 pegged today at 9.9%, and the current earnings yield is an attractive 4.3%.
II) U.S.payroll employment jumped by 266,000 jobs in November, blowing out the Street estimate of 180,000 jobs. The October payroll number was also revised upward by 41,000 jobs. The November jobs number was boosted by a settlement of the UAW/GM strike as manufacturing jobs jumped by 54,000. Healthcare, transportation and warehousing also saw a strong rise in jobs, while retail heading into the holiday season added 2000 jobs.
III) The U.S. unemployment rate fell from 3.6% to 3.5%, the lowest reading since 1969. The average worker’s hourly earnings rose by $0.07 to $28.29, bringing the pay increase to an annual rate of 3.1% over the past 12 months. The strong labor market has permitted the U.S. consumer to continue with their spending, which should help the long-term U.S. expansion now in its 11th year stay on track.
IV) In December, the University of Michigan Consumer Sentiment Survey remained strong, increasing from 96.8 in November to 99.2, its highest level since May. The gain was led by higher-income households benefiting from the strong stock market. The current conditions component rose 3.6 points. The expectations index rose 1.6 points. Inflation expectations fell.
V) Equities in December are mixed with Small-Cap, Value, Energy and Healthcare leading equity price performance. The laggards for the month are Mid-Cap, Growth, Industrials and Con. Discretionary.
Capitalization: Large Caps +0.15% (YTD +27.92%), Mid-Caps -0.01% (YTD +27.60%) and Small Caps +0.59% (YTD +22.73). Style: Value +0.86% (YTD +22.88%) and Growth +0.54% (YTD +22.15%). Industry Groups: Technology -0.38% (YTD +43.00%), Information Technology -0.37% (YTD 42.82%), Financials +0.80% (YTD +29.47%), Industrials -1.07% (YTD +27.82%), REITs -0.24% (YTD +26.85%), Consumer Staples +1.12% (YTD +25.76%), Communication Services +0.36% (YTD +25.46%), Consumer Discretionary -0.50% (YTD +24.26%), Utilities +0.32% (YTD +22.28%), Materials +0.11% (YTD +20.70%), Healthcare +0.94% (YTD +17.57) and Energy +1.52% (YTD +6.98%).
EUROPEAN EQUITIES
The MSCI Europe index rose last week by +0.15% on a report that the U.S. and China were moving closer to an agreement for a Phase One trade deal.
Drivers: I) Eurozone GDP grew by 0.2% during the third quarter and held steady at 1.2% year over year. The slowdown in trade has been a drag, but exports still rose and domestic demand was solidly supported by strong consumption growth. Across major countries, Germany’s GDP rebounded by 0.1% for the quarter after a 0.2% contraction. Eurozone GDP is projected to slow to 1.2% from 1.9% seen in 2018.
II) Euro zone retail sales plunged by a below-consensus 0.6% in October as nonfood sales dropped by 1.1% after a subpar 0.1% rise in September. Retail sales dropped in all of the nonfood subsectors. Despite the month’s disappointing results, the Street is still looking for continued growth in retail sales in the fourth quarter as fundamentals for consumers remain solid.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was higher by +0.15% for the week (MTD +0.15%, YTD +19.30%).
ASIAN EQUITIES
Asian equity markets were higher last week amid new hopes that a Phase One agreement between the U.S. and China was close. The Dow Jones Asia Index advanced by +0.34% for the week, (MTD +0.34%, YTD +6.42%).
Drivers: I) China’s manufacturing PMI exceeded expectations by growing in November, with the manufacturing rising to 50.2 after six consecutive months in recessionary territory. It was a broad-based recovery with rises in production, new orders, new export orders, and imports. Even though the first phase of the trade deal is still in the process of being completed, this positive news brought cautious optimism.
II) China’s exports in October fell 0.9% year over year, which was better than expected and exceeded the 3.2% decline in September. Imports also dropped by 6.4%, leading to an improvement in the trade balance to US$42.8 billion compared to US $39.7 billion in September. Exports to the U.S. fell by 16.2%, following double-digit declines in the previous two months. Phase one of the new trade negotiations between China and the U.S. is expected to be announced soon. This will provide a much-needed boost to business sentiment.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +0.26% (MTD +0.26%, YTD +18.98%), the Hang Seng Index rose by +0.56% (MTD +0.56%, YTD +2.56%) and the Shanghai Composite gained +1.39% (MTD +1.39%, YTD +16.77%).
FIXED INCOME
Treasury yields rose last week after better than expected U.S. jobs data drove investors into risk assets and tamped down any remaining fears of a potential US recession.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.841% up from 1.782%. The 30-year yield rose last week finishing at 2.280 climbing from 2.220%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.22% last week, MTD -0.22% and YTD +8.55%. The Bloomberg Barclays US MBS TR was lower by -0.04% last week, MTD -0.04% and YTD +6.01%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.35%, MTD +0.35% and YTD +12.48%.
COMMODITIES
The DJ Commodity Index was flat last week as well as for the month to date +0.00% (YTD +6.58%). Commodity prices were unchanged last week as the rally in oil was offset by a decline in precious and industrial metals.
Performance: I) The price of oil rallied +6.58% last week closing at $59.07 and has risen month to date in December by +6.58% (YTD +30.08%). Oil surged in price last week as OPEC and its allies agreed to curb production.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was lower by -0.60 ending at 97.68 for the week (MTD -0.60%, YTD +1.57%). The USD fell last week as hopes rose for a Phase One trade deal between the U.S. and China.
III) Gold declined last week after the U.S. jobs report came in better than expected at 266,000, its strongest showing since January. Gold was lower by -0.40% last week, falling to $1464.5 (MTD -0.40%, YTD +14.29%).
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:
- I) The HFRX Global Hedge Fund Index is higher at +0.01% MTD and up +7.73% YTD.
- II) Equity Hedge has risen by +0.19% MTD and is up +9.59% YTD.
- III) Event Driven is higher MTD +0.37% and is higher YTD +8.17%.
- IV) Macro/CTA has fallen by -0.88% MTD and is up +3.61% YTD.
- V) Relative Value Arbitrage has advanced by +0.04% and is up +5.54% YTD.
- VI) Multi-Strategy is up MTD at +0.05% and is higher by +5.21% YTD.
Data Source: Haver Economics
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