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Weekly Update

Market Summary

Despite international trade disputes and some political uncertainty heading into midterm elections, U.S. stocks posted a strong third quarter with the best quarterly returns since the fourth quarter of 2013. The Dow Jones notched the strongest performance, up 9.01% for the quarter, while the S&P 500 and NASDAQ climbed up 7.3% and 7.1%, respectively. Corporate earnings growth for the third quarter is expected to simmer down slightly from the first half of the year but remain in very robust territory, with 19% earnings growth projected for the S&P 500 constituents, according to FactSet, versus earnings growth of about 25% in the first two quarters. Investors will be paying close attention to whether or not companies meet these earnings expectations, in addition to geopolitical developments, as we head into October, which has historically exhibited the highest level of volatility of any month, both to the upside and the downside.

The fourth quarter kicks off this week after a last-minute trade deal was struck between the U.S. and Canada on Sunday night to revise the North American Free Trade Agreement just before a U.S-imposed deadline of October 1. The new pact, to be officially called the U.S.-Mexico-Canada Agreement, now includes additional rules for financial services and digital businesses that have emerged since NAFTA was originally created in 1994. Canada agreed to reduce protection for its dairy industry, while the U.S. withdrew demands to get rid of special NAFTA courts that allow members to challenge trade restrictions imposed by others. The agreement has boosted investor sentiment and equity markets in this week’s early trading.

The agreement with Canada has provided some relief in international trade tensions, but economic and diplomatic relations with China continue to strain. China has canceled a security meeting with the U.S. planned for mid-October, saying a high-level military official wouldn't be available to meet with Defense Secretary James Mattis. Aside from ongoing trade tensions, the news follows on recent developments in the military arena, including U.S. equipment sales to Taiwan and B-52 flyovers in the East China Sea and South China Sea.

In U.S. monetary policy news, the Federal Reserve decided to raise the Federal Funds Rate by 0.25% to a range of 2.0% to 2.25% at last Wednesday’s meeting, which was widely expected, as the U.S. economy continues to demonstrate broad strength. The coming week will provide important employment data, including the unemployment rate and wage growth, to give an updated economic picture.

Economic Highlights

  • Inflation: The US Personal Consumption Expenditures Price (PCE) core index came in at 2.0% Year-over-Year in August, which is in-line with the Fed’s 2.0% target. Inflation has been held in check partially by a stronger dollar that has made imports of finished goods and manufacturing inputs cheaper.
  • Consumer Sentiment: The Index of Consumer Sentiment from the University of Michigan fell slightly below the prior month and consensus expectations with a September reading of 100.1, as bearish views from international trade weighed on sentiment.

US Economy - The Week Ahead

Tuesday, 10/2/2018

No Data

Wednesday, 10/3/2018

ISM Non-Manufacturing PMI – Consensus Estimate: 58.1 (-0.7% MoM), Prior Month: 58.5 (5.0% MoM)

Thursday, 10/4/2018

Initial Jobless Claims – Consensus Estimate: 214,000 (0% WoW), Prior Week: 214,000 (6.5% WoW)
Durable Goods Orders Month-over-Month (Final) – Consensus Estimate: 4.5%, Prior Month: 4.5%
Factory Orders Month-over-Month – Consensus Estimate: 2.1%, Prior Month: -0.8%

Friday, 10/5/2018

Hourly Earnings Growth Year-over-Year – Consensus Estimate: 2.8%, Prior Month: 2.9%
U.S. Unemployment Rate – Consensus Estimate: 3.8%, Prior Month: 3.9%
Trade Balance – Consensus Estimate: -$52.6B (-5.0% MoM), Prior Month: -$46.3B (-8.2% MoM)

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