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Market Summary

An escalation in trade tensions has put increasing pressure on equity markets over the last week, as the optimism of a potential near-term resolution that helped push equities to record highs has started to be unwound. For the week, the S&P 500 and Dow Jones slid -2.1% and -2.0%, respectively, while the Nasdaq index sank even further with a -3.0% loss. The losses extended into early trading this week with the S&P 500 and Dow Jones shedding another -2.4% on Monday and the Nasdaq losing -3.4% due to its higher exposure to the trade-sensitive technology sector, which has been the hardest hit. Meanwhile, U.S. Treasury yields have sank across the curve as investors increase demand for the safe-haven asset. Financial markets may be in for more volatility ahead as any developments in the trade conflict will have significant implications for international economic growth and investor sentiment.

As promised, the White House implemented an increase in tariffs from 10% to 25% on $200 billion in Chinese goods on Friday to increase pressure for trade concessions from China. President Trump is also still considering whether or not to put tariffs on the remaining $325 billion of Chinese imports, most of which would be consumer goods that have largely avoided tariffs to this point. In retaliation, China has announced it will impose additional tariffs on $60 billion of U.S. goods. Despite the escalation, negotiations remain ongoing with President Trump agreeing to meet with Chinese President Xi at the G20 summit next month and both sides have noted cautious optimism.

First quarter corporate earnings season is nearly in the books with 90% of the S&P 500 companies having reported results to date. Results have generally exceeded expectations with 75% of S&P 500 companies having beat earnings forecasts and 58% having beat revenue expectations, according to FactSet. The index is on pace to post a blended earnings growth rate slightly above zero for the first quarter over a year ago compared to expectations for negative growth of -3.6% coming into earnings season.

In the week ahead, investors will continue to seek developments on the U.S.-China trade dispute and will assess a full docket of economic data, including readings on business and consumer sentiment, the housing market, and retail sales.

Economic Highlights:

Inflation: Consumer inflation continued to undershoot expectations in April with the U.S. headline CPI reading coming in at 2.0% year-over-year compared to the consensus forecast of 2.1%, though additional tariffs could threaten to pressure inflation higher in coming months. The Producer Price Index (PPI) also came in below expectations at 2.2% year-over-year versus the consensus of 2.3%.

Oil: Despite concerns of slowing demand for U.S. oil from China, crude oil prices were relatively stable last week as supply constraints from U.S. sanctions for Iran and Venezuela as well as other geopolitical conflicts have provided upward pressure on prices.

US Economy – The Week Ahead

Tuesday, 5/14/2019

  • NFIB Small Business Optimism Index – Consensus: 102.3 (0.5% MoM), Prior Month: 101.8 (0.1% MoM)

Wednesday, 5/15/2019

  • Retail Sales (Month-over-Month) – Consensus Estimate: 0.2%, Prior Month: 1.6%
  • Industrial Production (Month-over-Month) – Consensus Estimate: 0.1%, Prior Month: -0.1%

Thursday, 5/16/2019

  • Initial Jobless Claims – Consensus Estimate: 225,000 (-1.3% WoW), Prior Week: 228,000 (-0.9% WoW)
  • Housing Starts – Consensus Estimate: 1,220K (7.1% MoM), Prior Month: 1,139K (-0.3% MoM)
  • Building Permits – Consensus Estimate: 1,290K (0.1% MoM), Prior Month: 1,288K (-0.2% MoM)

Friday, 5/17/2019

  • University of Michigan Consumer Sentiment Survey (Preliminary) – Consensus Estimate: 97.6 (0.4% MoM), Prior Month: 97.2 (-1.2% MoM)
  • Leading Economic Indicator Index (Month-over-Month) – Consensus Estimate: 0.2%, Prior Month: 0.4%
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