Weekly Economic Update

Economic Update 2-19-2019

  • Economic data for the week included poor showings from retail sales and industrial production, in addition to higher jobless claims; inflation came in relatively muted on a producer and consumer basis; on the positive side, manufacturing and consumer sentiment survey data were better than expected.
  • U.S. equity and developed foreign markets experienced sharp gains on the week, outperforming weaker results in emerging markets. Bonds were little changed, other than riskier debt outperforming treasuries. Commodities pushed higher on the back of a strong week in crude oil.

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Weekly Economic Update

Economic Update 2-11-2019

  • Economic releases were again light, as the impact of the government shutdown has altered schedules for now-stale data, but the week did see a weaker, but still strong, result for ISM non-manufacturing, a trade balance that moved further into deficit than expected, and jobless claims continued to indicate strength in labor markets.
  • U.S. equity markets were flattish on the week as earlier optimism again tapered off due to skepticism about a U.S.-China trade agreement, although foreign stocks fared worse due to a stronger dollar.  Bonds performed decently on the back of lower interest rates.  Commodities declined on the week, driven by lower prices for crude oil and natural gas.

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Weekly Economic Update

Economic Update 2-04-2019

  • Economic data for the week included no change in the Federal Reserve’s policy interest rate, and more mixed results from housing, while positive results originated from ISM manufacturing data and labor markets, particularly the employment situation for January.
  • U.S. equity markets gained for the week, with foreign equities just behind.  Bonds eked out a minor gain as interest rates declined along the yield curve.  Commodities rose a bit upon a further recovery in crude oil prices.

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Fed Update

The FOMC unanimously decided on no policy action upon the conclusion of their January meeting, which was as expected.

The formal statement noted continued strength in the labor market and economic activity rising at a ‘solid’ rate (downgraded from December’s ‘strong’).  While household spending has continued to grow, a slowdown in business fixed investment last year was also mentioned.  Notably, the committee’s description of being ‘patient’ about determining future changes was newly inserted into the brief note, in consideration of both muted inflation but also global economic and financial developments as of late.  In fact, all mention of the ‘gradual increase’ path for interest rates was removed, which was telling.

Interestingly, one change for 2019 is that the Jerome Powell-led Fed will host a press conference with Q&A after all eight meetings, as opposed to only after the four quarterly ‘formal’ variety in past years.  While this may not have a major impact on policy, it could give the FOMC more latitude to make more controversial decisions at any of these meetings, since they’ve tended to do so only when a media backdrop was available to further clarify aims.  In contrast to the Fed of old, communications and ‘forward guidance’ have become important pieces of their toolkit.

Volatility in several segments over the past few months—including financial markets (volatile stock prices and wider credit spreads), the political environment/government shutdown, trade policy between the U.S. and China and a continued strong dollar—have also added to a general headwind of tightening financial conditions.  Such a tightening in overall conditions serves a similar purpose to the Fed raising rates directly, by tapping the brakes on the economy—which can either help the Fed, by doing the job for it, or acting as a hindrance in other cases.

There has also been speculation as to whether the Fed would slow the pace of drawing down their balance sheet of treasury and agency mortgage-backed securities (which it did not, but remains prepared to ‘adjust the details’ of this program over time as needed).  Beginning in Oct. 2017, the Fed began the process of unwinding the large quantitative easing program by letting a pre-determined amount of bond assets mature (up to a cap, which has increased in stages), which allows the reduction to be done gradually and avoid market distortions.  Since peaking at around $4.5 tril. at the time of the drawdown program’s inception, the current balance sheet size has declined to $4.0 tril.  Interestingly, the gradual pace of these drawdowns has not seemed to disrupt bond market supply/demand dynamics on the surface.  However, while this has been put in place as a ‘normalization’ program, intended to eventually get the Fed balance sheet to far lower sustainable levels, it does have the impact of ‘tightening’—as increasing treasury/MBS supply and reducing reinvestment demand could have the technical effect of raising interest rates, all else equal.  Somewhat fortunately, in a world of low overall interest rates throughout the developed markets of Europe and Asia, other global buyers had stepped in to fill the gap—especially since the cost of currency hedging was reasonable (those low costs have dissipated since, making this a less attractive trade).  Long-story short, the Fed may elect to alter their pace of balance sheet drawdown should additional signs of economic slowing occur, resulting in less possible upward pressure on longer-term rates, but also keep the balance sheet bloated for a longer period of time.  It’s no secret that the Fed would prefer to keep the balance sheet ‘purer’ by only holding treasury debt, and unload the unique pile of MBS, and removing the more politically-charged implied support of housing markets (which is not in their mandate).

Probabilities for rate hikes in 2019 have fallen sharply, down to about 25% for June and 30% for December (with the latter also including 5% odds of a rate cut—a recently added twist).  The laundry list of Fed mandate items hasn’t changed radically over the last few meetings, other than concerns over growth having increased:

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Weekly Economic Update

Economic Update 1-28-2019

• Economic data for the week was again limited by the government shutdown, and consisted of stronger house prices but weaker existing home sales, a tick down in the incomplete leading economic indicators, and sharply better and again record-breaking jobless claims.

• Global equity markets were mixed with foreign stocks outperforming U.S., with the help of a weaker dollar. Bonds gained slightly, as lower interest rates outweighed other factors, with foreign also outperforming due to currency effects. Commodities were down overall, with natural gas prices dropping sharply.

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Weekly Economic Update

Economic Update 1-21-2019

  • Although limited to some extent due to the Federal government shutdown, economic data for the week included a slight decline in producer prices, weaker consumer sentiment, mixed regional manufacturing results, but strong industrial production and jobless claims.
  • U.S. equity markets continued their recovery upward upon stronger sentiment, with foreign stocks in developed and emerging markets just behind.  Bonds ended the week with negative returns, as interest rates again ticked higher.  Commodities gained on the back of crude oil, which regained ground by several percent on the week.

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Weekly Economic Update

Economic Update 1-14-2019

  • Economic data for the week was lighter than usual, due to the Federal government shutdown, but was highlighted by a tempered but still-strong ISM services report, pullback in consumer inflation, decent labor data and release of the minutes from the last Fed meeting.
  • Global equity markets recovered by several percent, in a continued effort to shake off the bear market of last quarter.  Bonds were mixed, with interest rates inching higher.  Commodities gained ground, again led by a recovery in crude oil pricing.

 

U.S. stocks continued their recovery last week, up several percent on hopes (again) that the U.S.-China trade dispute would be resolved through ongoing talks.  It appears progress has been made in the areas of U.S. farm exports and better access to Chinese markets, while the key issue of Chinese technology pilfering remains unresolved.  There also appears to be some recognition of value in equity markets, with P/E’s falling below long-term averages, after spending parts of the last year or two looking a bit ‘tired’, which is a euphemism for mildly expensive, even if not quite bubble-like.  The now record-long government shutdown has not resulted in a major deterioration in market sentiment, although Fed chair Powell also acknowledged that a long-lasting episode could ultimately end up negatively influencing economic growth.

From a sector perspective, cyclicals outperformed, with industrials, consumer discretionary and technology leading, while defensive staples and utilities ended with minimal gains.

Foreign stocks rose along with U.S. equities, albeit to a lesser degree, with continued hope for U.S.-China trade resolution.  This correlation with domestic stocks has been the tendency over the past several months, which has outweighed fundamental concerns over weakness in economic growth shown by slower industrial production numbers in Germany and France, in particular, and mixed results in Japan, which is hoping to generate some inflation to show that growth could be eventually improving.  Overall, growth levels remain challenged in the foreign developed world, which has explained the weak results of regional stock markets.  Emerging markets outperformed developed, with hope for trade resolution, which boosted China and Pacific region equities, in addition to stronger commodity results as of late, which has boosted prospects for materials exporters.

U.S. bonds were mixed in the week, with government indexes down as interest rates ticked back higher slightly, but credit outperformed with spreads contracting.  Accordingly, high yield bonds experienced strongly positive results, followed by floating rate bank loans.  Each of the latter two asset classes suffered during the fourth quarter as investor flows away from risk highlighted their somewhat higher equity correlations compared to other segments of fixed income.  Foreign bonds gained slightly, with help from a weaker dollar.

U.S. treasury debt has long been thought of as the global ‘risk-free’ asset, where default is assumed to be unthinkable, and, therefore, is often the recipient of inflows when conditions turn sour in other asset classes.  However, there are times when ‘risk-free’ isn’t a failsafe, either.  As if the lesson wasn’t learned several years ago, the ongoing federal government shutdown has again caused bond rating agencies to discuss and/or even consider a de-rating for U.S. government debt.  Even while Standard & Poor’s downgraded treasury debt a partial notch to AA+ during that 2011 summer debt ceiling debacle, Moody’s and Fitch held firm at AAA (albeit with their respective outlooks downgraded less severely to ‘negative’).  However, Fitch has been providing warnings that stunts such as the government shutdown could again threaten that coveted AAA status, stating that such uncertainty was not consistent with behavior of nations deserving a top rating.

Real estate experienced very strong gains for the week, surpassing broader equity markets, with the exception of small cap.  Cyclically-sensitive lodging and resorts outperformed, although all segments were sharply positive.

Commodities gained several percent, again driven by the volatile movements of crude oil, but also a weaker dollar and an increase in natural gas prices.  Crude oil continued its roller-coaster ride, regaining ground to end the week 8% higher, at just under $52/barrel.  While OPEC has reiterated its desire to raise prices to more budget-friendly levels in Middle Eastern and Eastern European producing nations, much of the recent volatility has been coupled with equity market gyrations and concerns over global growth—although demand is far more predictable than short-term supply.  While forecasts are often not helpful in the commodity space, with no ‘fair value’ metrics based on actual cash flows, estimates for crude in the coming year appear to be in the mid- to higher-50s at this point.

 

Period ending 1/11/2019 1 Week (%) YTD (%)
DJIA 2.42 2.93
S&P 500 2.58 3.63
Russell 2000 4.84 7.36
MSCI-EAFE 2.89 3.90
MSCI-EM 3.75 3.67
BBgBarc U.S. Aggregate -0.04 0.18

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2018 2.45 2.48 2.51 2.69 3.02
1/4/2019 2.42 2.50 2.49 2.67 2.98
1/11/2019 2.43 2.55 2.52 2.71 3.04

 

 

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                               

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

 

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Weekly Economic Update

Economic Update 1-07-2019

  • Economic data was sparse in the first week of the new year, with ISM manufacturing data disappointing, but employment numbers came in much stronger than expected.
  • U.S. equity markets recovered during the week, largely due to Friday’s job news and optimistically-received Fed remarks; international stocks were not far behind, with more tempered gains.  Bonds also gained a bit of ground along with lower interest rates.  Commodities earned positive returns, due to a recovery in crude oil prices.

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Weekly Economic Update

Economic Update 12-31-2018

  • In a week shortened by the Holidays and a government shutdown, affecting the release of certain economic data, consumer confidence declined sharply, housing data was mixed, while jobless claims remained strong.
  • Global equity markets ended the week with gains, despite continued mixed sentiment and unseasonal volatility.  Bonds fared decently with lower rates in the U.S., and foreign debt being helped by a weaker dollar.  Commodities lost a bit of ground, with continued decreasing prices for crude oil.

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Weekly Economic Update

Economic Update 12-24-2018

  • In a busy week for economic data to nearly wrap up 2018, the Federal Reserve raised interest rates by another quarter-percent.  In other economic data, sentiment, leading economic indicators and jobless claims remained strong; durable goods orders and several manufacturing surveys, were positive but lackluster; and housing data was mixed.
  • U.S. equity markets suffered mightily again last week, with a variety of concerns weighing on investors’ minds.  Foreign stocks lost ground as well, although emerging markets held up better than developed markets.  Government bonds fared decently due to the movement away from risk and lower long-term yields.  Commodities struggled due to a double-digit decline in the price for crude oil.

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Fed Update

Fed Note:

The Federal Reserve Open Market Committee raised the fed funds target rate by 0.25% to a new level of 2.25-2.50%.  This was widely anticipated, with a high futures market probability of this outcome beforehand.  There were no committee dissents.

The formal statement was little altered from November, noting that economic activity remains strong, unemployment remained low, household spending has continued to grow, business fixed income has moderated, and inflation remains near the policy target.  However, there was a tempering of language in terms of further rate hikes (including insertion of the word ‘some’) as well as a comment that the Fed ‘will continue to monitor global economic and financial developments’ for assessment in future policy actions.  Overall, the updated economic output pointed to a base case of about two interest rate increases next year.

The issue as of late has been a pause in economic acceleration, with building fears that the peak in economic activity has been reached, and an eventual slowdown and recession being the next stop.  However, it is possible this assumption may still prove premature.  In keeping with changing data, what was once thought of as a done deal—a continuation of this same pace of rate hikes into 2019—is now looking far less certain.  Initial estimates by a variety of economists of 2-4 hikes next year have fallen back to 1-2, in keeping with the Fed’s assumptions, with the caveat of policy activity remaining even more ‘data dependent’ than usual.  Chair Jerome Powell’s comments during the last several weeks have confused markets a bit—with initial comments alluding to the current fed funds rate being ‘far below’ the ideal level, while more recent discussion pointed to the current rate being ‘just below’ ideal.  Probabilities for future hikes are certainly dependent on this changing sentiment and communication posturing to a certain degree.

On the dashboard:

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Weekly Economic Update

Economic Update 12-17-2018

  • Economic data for the week came in mixed to decent, with retail sales a bit stronger than expected, continued strength in job openings and jobless claims, as well as tempered producer and consumer inflation results.
  • U.S. equity markets declined over fears of possible slowing growth, as did foreign stocks, with small gains turned to losses after being adjusted for a stronger dollar.  Bonds were mixed, with impacts dependent on duration, credit quality and currency last week.  Commodities lost ground due to the stronger dollar and continued falling energy prices.

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