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Weekly Update

Market Summary

A sharp reversal in investor sentiment last week resulted in the largest weekly drop for equity markets since March and ceded much of the year-to-date gains across the broad U.S. equity market. For the week, the tech-heavy NASDAQ index lost the most with a -4.9% slide, while the S&P 500 and the Dow weren’t far behind with losses of -4.6% and -4.4%. Respectively, the three equity indices’ year-to-date returns now stand at 2.0%, 0.3%, and 0.9%, including dividends. However, U.S. equities have fared better than foreign equity markets this year with the MSCI All-Country World Index excluding the U.S. standing at a year-to-date loss of -7.7%. The negative equity market turmoil this past week was largely attributed to heightened skepticism of the ability of the U.S. and China to reach a trade agreement in the next 90 days and a slight inversion in the U.S. Treasury yield curve, in addition to the existing headwinds of peaking corporate profit growth concerns, slowing global economic growth, and normalization of monetary policy.

Many market participants have been closely watching the U.S. Treasury yield curve after the 2-year Treasury yield rose above the 5-year Treasury yield on Tuesday for the first time since 2007. Historically, yield curve inversions have served as bearish signals of looming economic slowdowns as they have preceded most U.S. recessions. The U.S. economy broadly remains on solid footing, as indicated by last week’s employment report, but some cracks are beginning to show, particularly in rate-sensitive sectors like housing and automobiles.

The recent surge in investor anxiety regarding the likelihood of a near-term trade agreement between the U.S. and China is the result of the arrest of the CFO and heir apparent of Chinese telecom giant Huawei in Canada at the behest of the U.S. on Wednesday of last week as well as some hardline comments on the upcoming trade negotiations from the White House.

In the week ahead, investors will be paying close attention to important inflation data to see if the recent decelerating trend continues, which could ease pressure on the Fed to continue raising interest rates at the current pace.

Economic Highlights: 

Employment: Last week’s employment report has generally been viewed as a positive indication for markets as it hinted that economic growth remains on strong footing but not at a pace to overheat and force the Fed into a more aggressive monetary policy stance. Hiring remained at a healthy pace with 155k jobs added in November, compared to the prior month addition of 237k jobs and consensus expectations for 197k new jobs.

Manufacturing and Service Sectors: November’s readings of both the ISM manufacturing and non-manufacturing (services) indicators of 59.3 and 60.7 came in above expectations of 57.5 and 59.2, respectively, which is a positive signal. However, a growing number of respondents highlighted challenges from tariffs and a tight labor market.

US Economy – The Week Ahead

Tuesday 12/11/2018

  • NFIB Small Business Optimism Index – Consensus Estimate: 107.3 (-0.1% MoM), Prior Month: 107.4 (-0.5% MoM)
  • U.S. Producer Price Index (PPI) Year-Over-Year – Consensus Estimate: 2.4%, Prior Month: 2.9%

Wednesday 12/12/2018

  • U.S. Consumer Price Index (CPI) Year-Over-Year – Consensus Estimate: 2.2%, Prior Month: 2.5%

Thursday 12/13/2018

  • Initial Jobless Claims – Consensus Estimate: 226,500 (-1.9% WoW), Prior Week: 231,000 (3.1% WoW)
  • U.S. Import Price Index Year-over-Year Growth – Consensus Estimate: 1.7%, Prior Month: 3.5%
  • U.S. Export Price Index Year-over-Year Growth – Consensus Estimate: 2.4%, Prior Month: 3.1%

Friday 12/14/2018

  • Industrial Production (Month-over-Month) – Consensus Estimate: 0.30%, Prior Month: 0.10%
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