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Market Summary

Despite concerns of the global economic blowback from the coronavirus outbreak, U.S. equity markets rallied back last week to post their best weekly returns since June of last year as corporate earnings results and U.S. job growth exceeded expectations and China announced plans to slash tariffs, providing a boost to investor sentiment. For the week, the S&P 500 advanced 3.2%, while the Dow and Nasdaq Composite gained 3.0% and 4.0%, respectively. Meanwhile, the 10-year Treasury yield pushed as high as 1.68% on the positive U.S. economic data but slid lower to close the week at 1.58% following disappointing manufacturing data out of the Eurozone.

The latest update on the spread of the coronavirus notes that the number of confirmed coronavirus cases has surged to 42,638 with the death toll reaching over 1,000, both marks well surpassing those of the SARS epidemic in 2002, although there are signs of a deceleration in the number of new cases. The coronavirus is expected to have a significant near-term impact on the global economy, possibly shaving $280 billion off of global GDP in the first quarter according to Capital Economics, but economists are broadly forecasting a rebound in growth thereafter if the epidemic does indeed start to ease. In an effort to stimulate its economy in response to the outbreak, the People's Bank of China has injected 1.7 trillion yuan (about $243 billion) of liquidity into the market.

At the same time, China and the U.S. are seeking to ease the economic burden of their trade conflict as China outlined plans last week to halve tariffs on $75 billion of U.S. imports. The reductions will be put into place starting February 14th, with tariffs falling from 10% to 5% on some U.S. goods and from 5% to 2.5% on others. The U.S. will simultaneously reduce tariffs on about $120 billion of Chinese goods as part of the phase one trade agreement.

In the U.S., the job market continued to demonstrate its strength last week as employers added 225,000 jobs to the economy in January compared to expectations for just 158,000 new jobs. The unemployment rate ticked up to 3.6% from 3.5% in the month prior driven by an increase in the amount of people reentering the labor force and searching for work. The positive employment data came on the back of better than anticipated readings in both the U.S. service and manufacturing sectors.

In the week ahead, much of the market focus will turn to the Federal Reserve as Chairman Jerome Powell is set to give his semi-annual testimony to Congress where he will discuss the Fed’s strategy on the repo market, the economic impact of the coronavirus, and the accelerating federal budget deficit, among other topics. Also, fourth quarter corporate earnings reports will continue to roll in with the S&P 500 on track for a positive 0.8% earnings growth over the prior year with a third of the index still yet to report results.

Economic Highlights

  • Manufacturing & Service Sectors: The U.S. ISM manufacturing and non-manufacturing surveys both surprised to the upside last week with the manufacturing index rebounding into expansion territory for the first time since last July with a January reading of 50.9 versus the consensus expectation of 48.5. The non-manufacturing survey remained in expansion territory at 55.5, up from the prior month reading of 54.9.
  • Wage Growth: Year-over-year wage growth in the U.S. ticked up to 3.1% in January from 3.0% in the month prior. The reading continues to fall in the economic sweet spot that is supportive of the U.S. consumer but not running too hot where it is pressuring up overall inflation or substantially cutting into corporate earnings.

US Economy - The Week Ahead

Tuesday, 2/11/2020

  • NFIB Small Business Optimism Index – Actual: 104.3 (1.6% MoM), Prior Month: 102.7 (-1.9% MoM)
  • Job Openings & Labor Turnover Survey – Consensus: 6,888K (1.3% MoM), Prior Month: 6,800K (-7.6% MoM)

Wednesday, 2/12/2020

  • Fed Chairman Jerome Powell gives semiannual monetary policy testimony to Congress

Thursday, 2/13/2020

  • Initial Jobless Claims – Consensus Estimate: 212,000 (5.0% WoW), Prior Week: 202,000 (-6.9% WoW)
  • U.S. Consumer Price Index (CPI) Year-over-Year – Consensus Estimate: 2.4%, Prior Month: 2.3%

Friday, 2/14/2020

  • Retail Sales (Month-over-Month growth) – Consensus Estimate: 0.3%, Prior Month: 0.3%
  • Industrial Production (Month-over-Month growth) – Consensus Estimate: -0.25%, Prior Month: -0.3%
  • University of Michigan Consumer Sentiment Survey (Preliminary) – Consensus Estimate: 99.1 (-0.7% MoM), Prior Month: 99.8 (0.5% MoM)
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