HIGHLIGHTS:
The S&P 500 gave back most of the previous week’s gains.
U.S. economic data remains healthy.
Cautious/dovish comments from Fed officials suggest fewer rate hikes in 2019.
The Week Ahead: Inflation and retail sales updates are on tap.
The S&P 500 gave back the previous week’s gains.
The week started well, as Via Nova expected, when the markets rallied on news of a 90-day trade truce with China reached on the previous Saturday evening which postpones additional tariffs scheduled for January 1. However, optimism and the markets turned abruptly negative on Tuesday, after President Trump turned up the trade negotiating rhetoric declaring himself a “Tariff Man.” The markets were closed Wednesday in a day of mourning for the former President George H. W. Bush. The selling pressure intensified Thursday after it was learned that Canadian officials arrested the Chief Financial Officer of Chinese telecom giant Huawei Technologies for alleged violations of Iran sanctions…at the request of the United States. Huawei has been suspected of numerous infractions in recent months, and both the U.S. and China agreed that the arrest was unrelated to the trade negotiations. Still, the arrest of a high-profile Chinese figure only served to raise tensions and lower stock prices.
The S&P 500 gave back most of the gains of the previous week despite continued solid domestic economic data, as the market fretted over renewed trade tensions with China. The S&P 500 fell over -4½% in the first week of December following the nearly 5% surge in the last week of November. Financials and industrials paced the selloff, with only the more defensive utilities sector posting a gain for the week. Small cap stocks underperformed the S&P 500, but international and emerging markets stocks fell less than the U.S. benchmark.
In other markets, investor fears and more cautious/dovish comments from Federal Reserve officials pushed the yield on the 10-year Treasury note down from 3% down to 2.85%, helping lift the Bloomberg/Barclays Aggregate Bond Index. Oil prices rebounded on news of OPEC and Russia plans to cut output by over 1 million barrels per day to curb the excess supply that prompted the recent oil price selloff. Oil prices have fallen nearly 13% so far this year, which is a boon to motorists, but a severe drop in oil prices could prompt domestic oil producers to cut output and employment. Speculation that the Federal Reserve might slow or pause planned interest rate increases helped push down the value of the dollar and boosted interest in inflation hedges, such as gold and Treasury Inflation-Protected Securities (TIPS).
U.S. economic data remains healthy.
Job growth and manufacturing activity remained firm in November pointing to a continued healthy economy. The employment report, a key economic update, was something of a Goldilocks blend of continued jobs gains but with limited wage inflation… not too hot to spur inflation worries and not too cold to kindle recession fears. The U.S. economy added 155,000 jobs, a bit below expectations, for a record-setting 98 straight months of gains, and the unemployment rate remained at the lowest level in nearly fifty years. The ISM Manufacturing Survey was stronger than expected, as companies increased orders, production and employment. Together, these two reports suggest continued income, sales and profits growth.
Cautious/dovish comments from Fed officials suggest fewer rate hikes in 2019.
A steady stream of Federal Reserve officials gradually shifted their view of the need for steady interest rate increases through the end of next year - a positive for equities and one of the major headwinds for stock prices this year. The latest was Lael Brainard, who noted strong domestic economic momentum and a favorable outlook for the coming year, but “fading tailwinds” from slower global growth and “crosscurrents” from China trade tensions and Brexit, among others.
Via Nova believes the Federal Open Market Committee (FOMC) will probably raise the federal funds rate by another quarter percent at the upcoming December 18-19 meeting, but signal a pause in future rate hikes while the current headwinds and crosscurrents are resolved one way or another. The next rate increase is not needed, in our view, but the FOMC has exerted considerable energy managing market expectations regarding its future actions. Any unexpected change in plans might needlessly generate market concerns that the domestic economy could be in trouble.
The Week Ahead: Inflation and retail sales updates are on tap.
Investors will be hoping for fewer trade fireworks in the coming week and instead concentrate on the macro data.The Consumer Price Index is expected to show a slower rate of inflation, supporting a less aggressive policy from the Federal Reserve.Also, November retail sales are due on Friday, though most analysts are confident about the health of the consumer.