Economic Update 10-14-2019

• In a slow week for economic data, producer and consumer inflation measures were mixed, but remained in tempered ranges. Labor releases were mixed as well, with government measures of job openings falling, while jobless claims remained low.
• U.S. and foreign equity markets both gained several days last week with positive sentiment towards U.S.-China trade meetings staying on track. On the flip side, bonds fell as flows moved toward equities, pushing up interest rates a bit. Commodities generally moved higher, along with a spike in oil prices in keeping with new Iranian flare-ups in the Persian Gulf.

U.S. stocks fared well last week, with several days of upward movement due to perceived progress in trade talks between the U.S. and China, with the announcement of a light ‘Phase 1’ deal. This essentially included a decision to not move ahead with schedule Oct. 15 tariffs on China, along with China’s agreement to purchase up to $50 bil. of U.S. agricultural products. Obviously, the bar for something positive to happen at this point is quite low. While the Chinese were seen as capitulating a bit to U.S. demands for a deal, the intellectual property protection component remains a key sticking point yet to be resolved. As this is one of the most important elements for the U.S., hopes for a grand resolution could remain difficult to achieve. In addition, the creation of a ‘blacklist’ of Chinese firms, which would be locked out of U.S. company supply chains, continue to add negative pressure to the Chinese economy. However, threats of such lists and restriction of U.S. financial investment in Chinese companies has continued to wax and wane repeatedly in recent weeks.

By sector, materials and industrials led the way, while defensives utilities and consumer staples actually lost ground on the week, with bond proxy asset popularity falling, along with conventional bonds. Earnings results for Q3 will be coming out over the next several weeks, with expectations for a third straight negative quarter of earnings growth on a year-over-year basis. While equity market sentiment generally remains heavily glued to trade, per FactSet, corporate earnings calls have been more focused on the negative aspect of the strong U.S. dollar, in addition to weather effects last quarter and slowing growth in Europe. In particular, a strong dollar hurts exporters and also decreases revenues earned in foreign currencies.

Foreign stock returns were largely in line with those in the U.S., with continued risk-on/risk-off sentiment tied predominately to trade news. The only meaningfully local news was apparent progress in the Brexit debate, specifically the continued outstanding issue of Ireland-Northern Ireland border treatment, which pushed the pound up nearly 3% on the week. The Oct. 31 deadline is rapidly approaching, with expectations by many for another extension absent more progress. Odds continue to remain split among the various outcomes. Japanese stocks fared positively in local terms, but turned the opposite direction when translated to the U.S. dollar, with negative government sentiment about economic growth and a typhoon weighing on markets there compared to elsewhere in the world. Emerging markets underperformed developed markets slightly on the week, with mixed results across nations and little underlying theme. China fared strongly with last week’s hopes for trade progress, while Turkish stocks were pummeled following their military offensive into Syria. Aside from the natural uncertainty that arises during such actions, the probability of punitive sanctions from the U.S. and other nations has risen sharply.

U.S. bonds fell back in price last week, as investors felt more comfortable risk taking, which drove interest rates higher across the board. Long duration treasuries fared worst, as expected, while high yield ended as the sole positive returning bond sector, with a higher correlation to equities. The dollar fell back a bit last week, which tended to help foreign bonds a bit, although developed market sovereigns remained negative, while some emerging market indexes eked out small positive returns.

Real estate fell back last week in the U.S., along with higher interest rates and a movement away from defensive equity assets. By contrast, Europe experienced strong gains of several percent, more in keeping with broader equities, led by strength in the U.K.

Commodities generally rose with a weaker dollar, with losses in risk-sensitive precious metals offset by gains in all other segments—notably energy as the price of crude oil rose by over 3% to just under $55/barrel. Despite an easing of Saudi-Yemeni tensions in recent weeks, a missile strike on an Iranian tanker near a Saudi port city caused tensions in the Middle East to rise again, along with prices.

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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