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Market Summary

Major U.S. equity indexes broke off a three-week streak of consecutive gains last week amid turbulence from rising tensions in the Middle East that sent oil prices soaring and some less optimistic reports on the progress of U.S.-China trade negotiations. For the week, the Dow declined -1.1%, while the Nasdaq Composite and S&P 500 recorded losses of -0.7% and -0.5%. Meanwhile, the 10-year U.S. Treasury yield fell to 1.75% from 1.90% in the week prior amid the geopolitical tensions and slowing global growth outlook. As broadly anticipated, the Federal Reserve decided to cut the federal funds rate by 0.25% in an effort to offset these mounting headwinds to the domestic economy.

Oil prices stabilized somewhat throughout the week after rising 14.6% on Monday alone, the largest one-day gain since the 1991 Gulf War, in response to an attack on a major oil refinery in Saudi Arabia. Saudi officials have pledged to restore production to regular levels in short order, possibly by the end of the month, which drove prices back down to finish the week at a 6.7% increase. The S&P 500 energy sector posted a 1.0% increase for the week as a result of rising oil prices.

The outlook on trade negotiations soured a bit on Friday following a decision by a Chinese trade delegation to cancel visits to farms in Montana and Nebraska and an announcement from the White House that there is no interest in a limited trade deal that would lower some barriers in exchange for greater purchases of some U.S. agricultural goods. However, multiple reports have recently stated that the cancelled farm visits had nothing to do with trade talks and that both sides have conveyed recent talks as being constructive.

In the week ahead, market participants will likely remain focused on trade developments as President Trump is set to meet with Japanese Prime Minister Shinzo Abe at the annual United Nations General Assembly to discuss a possible trade agreement, which the White House expects will be completed this week.

Economic Highlights

  • Overnight Lending Market: Last week, the overnight funding market utilized by U.S. banks underwent some unexpected turbulence as the rates on short-term repurchase agreements jumped from around 2.0% to up to 10.0% at one point, forcing the Federal Reserve to step in and inject $278 billion to relieve the lack of liquidity. The volatility has been partly attributed to large cash outflows from the banking system amid corporate tax payments and a Treasury debt auction settlement, but such a seize-up in liquidity could prove more dangerous amid other economic shocks.
  • Manufacturing: U.S. industrial production rebounded in August up 0.6% from a disappointing July growth reading of -0.1% driven by a surge in mining and utility sectors. Overseas in Germany, however, factory activity has slowed to levels last seen during the global financial crisis as the country's manufacturing PMI fell to 41.4 in September, from 43.5 the previous month as geopolitical tensions and the bleak outlook for the auto industry continue to weigh on the sales and growth outlook for the country.

US Economy – The Week Ahead

Tuesday, 9/24/2019

  • S&P/Case-Shiller Home Price Index Year-over-Year Growth – Consensus Estimate: 2.2%, Prior Month: 2.1%

Wednesday, 9/25/2019

  • New Home Sales – Consensus Estimate: 660K (3.9% MoM), Prior Month: 635K (-12.8% MoM)

Thursday, 9/26/2019

  • Initial Jobless Claims – Consensus Estimate: 212,000 (1.9% WoW), Prior Week: 208,000 (1.0% WoW)
  • U.S. Second Quarter 2019 GDP Growth Year-over-Year (Final) – Consensus Estimate: 2.3% (2.0% QoQ), Prior Quarter: 3.2% (3.1% QoQ)

Friday, 9/27/2019

  • Personal Consumption Expenditures (PCE) Index Year-over-Year – Consensus Estimate: 1.4%, Prior Month: 1.4%

  • Durable Goods Orders Month-over-Month Growth (Preliminary) – Consensus Estimate: -1.2%, Prior Month: 2.0%

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