VIA NOVA UPDATE: Stocks move further into record territory.

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  • The S&P 500 hit a new weekly record.

  • Economic momentum remains favorable.

  • U.S. / China trade tariffs scheduled, but less than expected.

  • The Week Ahead: Focus on trade talks, housing, and Philly Fed survey.

The S&P 500 hit a new weekly record.

The S&P 500 rose to another weekly record helped by positive economic reports and a lower than expected U.S. tariff on Chinese goods.  Financials and materials led the advance, instead of the long dominant technology sector, suggesting a possible, long overdue participation from previously lagging sectors.  Broader participation within the market is a sign of strength and durability.

Better than expected trade news, whatever the degree or form, tends to help large cap exporting companies and especially international equity markets, which are more export oriented.  The Dow Jones Industrial Average (DJIA) jumped over 2% for the week.  International and emerging market stocks also rallied on the news, while small cap stocks fell.

The yield on the 10-year Treasury moved up through 3% to close at 3.07%, very close to the 3.11% high reached in mid-May.  The yield increase helped drag down the Bloomberg Barclays Aggregate Bond Index -0.28%, bringing the index down -1.85% year to date.  In other markets, the dollar fell over 1% amid lessening trade tensions, but oil and gold prices rose.

Economic momentum remains favorable.

Economic momentum remains favorable, which bodes well for future corporate sales and earnings growth.  Based on available data through August, the Atlanta Fed’s GDPNow model estimates third quarter real GDP growth at 4.4%, nearly double the pace so far in this expansion.

The labor market is healthy supporting consumer income and spending.  The number of weekly first-time jobless claims dropped to the lowest level in almost 50 years in the latest report.  Particularly noteworthy is the number of people in the labor force has doubled during that time, from 81 million to the current 162 million, making the very low number even more impressive.

In other updates, business activity jumped more than expected in September according to the latest Philly Fed business survey, and the various survey components related to employment, production and new orders all moved higher.  However, while activity rose, the number of businesses reporting higher input prices fell, suggesting that inflation pressures remain limited.  Lower than expected inflation has been a surprise to most analysts…and to the Federal Reserve in the current business cycle.

The relative soft spot in the week’s reports came from the housing sector.  Housing starts inched higher last month as did new home completions, but existing home sales were flat, as limited inventories, rising rates and higher prices weighed on activity.  The good news for existing homeowners is that the median sales price rose 4.6% from a year ago and nationwide prices are up over 20% from the pre-crisis peak.  This rise means that, on average, fewer homeowners are “stuck” in underwater mortgages, have more home equity, and are in a stronger financial position.

China trade tariffs less than expected, but China canceled negotiations.

Relative good news is not necessarily good news.  The U.S. imposed 10% tariffs on approximately $200 billion of Chinese imports effective September 24, escalating to 25% at the end of the year.  The 10% tariff was lower than the 25% feared by the markets, and stocks rose on the announcement.  China, as expected, immediately responded with plans to impose 5% to 10% tariffs on $60 billion of U.S. goods…also on September 24.  China decided to cancel upcoming trade negotiation talks with the U.S.  However, China is planning to cut the average tariff rates on imports from the majority of its trading partners as soon as next month, including the U.S., fulfilling a previous pledge.  Trade tensions will likely remain a cloud over the markets in the months ahead and a continuing source of volatility.

Trade negotiations with Canada continued, but time is running out.  Kevin Hassett, the chairman of the Council of Economic Advisers, said the Trump administration is "getting very, very close to the deadline" (October 1) to move forward on a trade deal with Mexico, even though Canada has yet to reach an agreement with the United States.

The Week Ahead: Focus on the FOMC and trade.

The Federal Open Market Committee (FOMC) will hold its two-day meeting and is widely expected to announce another quarter-point increase in short term interest rates on Wednesday to the 2%-2.25% range.  An increase in the prime rate to 5.25% is also likely.  With a rate increase largely “baked in the cake”, investors will likely focus on the post-meeting press conference for clues regarding future rate hikes.  Currently, the markets have priced in a high probability of a December rate rise with several more expected in 2019.  However, with the federal funds rate at or above 2%, heightened trade tensions, and lower than expected inflation pressures as well as continued low rates in the rest of the world, the FOMC could decide to slow the pace of future rate increases.  A lower rate hike trajectory would be positive for both stock and bond markets.

On the trade front, The U.S. and China trade tariffs hit on Monday.  Also, the tentative deadline for a trade agreement with Canada comes at the end of the week.  The markets would likely cheer any trade agreement that would also include Mexico.