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Weekly Update

Market Summary

U.S. equities continued to surge higher this past week as investors shifted out of safe haven assets like U.S. Treasury bonds in favor of riskier assets driven by optimism on trade negotiations between the U.S. and China and receding fears of a near-term economic recession. For the week, the S&P 500 gained 0.9% to increase its year-to-date total return to over 25%, while the Nasdaq Composite and Dow Jones returned 1.1% and 1.4%, respectively. Meanwhile, the U.S. 10-year Treasury yield jumped from 1.73% up to 1.93%, its highest point since July 31, indicating renewed belief that economic growth can remain positive. The Treasury yield curve has steepened to the point where there are no longer any notable inversions in which shorter maturity bonds yield more than longer maturity bonds.

Rising bond yields and improved optimism on the geopolitical and economic outlook have led to a notable rotation in the stock market out of bond proxy sectors with high dividend yields into cyclically sensitive sectors. Over the last month alone, this trend has boosted the S&P 500 financial services and industrial sectors to returns of 11.5% and 10.4%, while investors shed exposure to the high yielding utility and real estate sectors, which lost -3.1% and -3.4%, respectively, over the past month.

Although sentiment and headlines have generally turned positive on the U.S. and China’s progress toward a phase one trade deal, President Trump noted on Saturday that reports of the White House’s willingness to roll back current and proposed tariffs are incorrect and overstated. China trade delegates are seeking removal of U.S. tariffs that were implemented in September and those proposed to start in December as part of an interim deal, but no agreements have been officially announced toward that end.

In the week ahead, market participants will tune in for several speeches from members of the Federal Reserve on the economic outlook and monetary policy strategy, and they will be monitoring trade developments and updated data on inflation and retail sales.

Economic Highlights

  • Service Sector: The U.S. ISM non-manufacturing index reading came in stronger than expected for October with an increase from 52.6 in September to 54.7, compared to expectations for an increase to 53.3. Any reading above 50 indicates that the service sector is in expansion territory.

  • Labor Productivity: According to the U.S. Labor Department, the real output per worker, which is the primary measure of workforce productivity, fell at annualized rate of -0.3% in the third quarter, compared to 2.5% productivity growth in the second quarter. Economic growth is essentially a function of the number of people in the labor force and how productive they are, so slowing productivity growth would weigh on the growth outlook.

  • Consumer Sentiment: The University of Michigan Consumer Sentiment survey ticked up slightly in the preliminary November reading, rising to 95.7 from 95.5 in the month prior as easing financial conditions and a strong employment picture were a boost to confidence.

US Economy – The Week Ahead

Tuesday, 11/12/2019

  • NFIB Small Business Optimism Index – Actual: 102.4 (0.6% MoM), Prior Month: 101.8 (-1.3% MoM)

Wednesday, 11/13/2019

  • U.S. Consumer Price Index (CPI) Year-over-Year – Consensus Estimate: 1.7%, Prior Month: 1.7%
  • Hourly Earnings Growth (Year-over-Year) – Consensus Estimate: 3.0%, Prior Month: 3.0%

Thursday, 11/14/2019

  • Initial Jobless Claims – Consensus Estimate: 215,000 (1.9% WoW), Prior Week: 211,000 (-3.7% WoW)
  • U.S. Producer Price Index (PPI) Year-over-Year – Consensus Estimate: 0.9%, Prior Month: 1.4%

Friday, 11/15/2019

  • Retail Sales (Month-over-Month growth) – Consensus Estimate: 0.2%, Prior Month: -0.3%

  • Industrial Production (Month-over-Month growth) – Consensus Estimate: -0.35%, Prior Month: -0.4%

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