HIGHLIGHTS:
The S&P 500 decline left the index slightly negative year to date.
U.S. economic data remains healthy, but international momentum slowed.
Positive developments in trade talks, but arrests and accusations keep tensions high.
The Week Ahead: The FOMC meeting will be the focus. Government shutdown?
The S&P 500 decline left the index slightly negative year to date.
Sometimes the markets move counter to the information. In the U.S., consumer spending was stronger than expected, and China indicated trade concessions, which are positive developments for domestic stocks. Overseas, economic momentum slowed in the EU and China, Brexit negotiations were in chaos, and France was paralyzed by the “yellow vest” movement, which are negative developments for international equities. However, the favorable U.S. news did not translate into stronger stock market performance. Indeed, international markets outperformed the S&P 500 on a relative basis. Energy and financial stocks paced the decline, while the more defensive utilities and communications services stocks improved. The S&P 500 closed the week down 1% year to date and just over 11% from the September high, denoting a correction, which historically occurs every year on average, and this year has been no exception.
In other markets, the fear and negativity in the stock market had little effect on the bond market, where the Bloomberg/Barclays Aggregate Bond Index finished nearly flat. Oil prices resumed their decline but stayed above $50/barrel. Prices below $50 could potentially prompt oil production cuts and layoffs, as it did in 2016. Inflation hedges, such as gold and Treasury Inflation-Protected Securities (TIPS) fell, while the value of the dollar soared 1%, and is up 6% so far in 2018. A stronger dollar reduces the cost of foreign goods, but it makes U.S. goods more expensive abroad and less competitive.
U.S. economic data remains healthy, but international momentum slowed.
The available information suggests the U.S. consumer is healthy and spending. Retail sales rose in November, and pace of spending growth accelerated over the past three months pushing up estimates of fourth quarter GDP growth to 3%. Moreover, the labor market remains tight. Filings for initial jobless claims fell back down near a 49-year low, and the number of available jobs continued to exceed the unemployed Americans. Before March of this year, job openings had never exceeded unemployed workers in more than 17 years of monthly records.
Overseas, however, measures of monthly economic activity slipped in both the EU and China suggesting weaker international momentum. Global growth estimates have been lowered in recent months.
Positive developments in trade talks, but arrests and accusations keep tensions high.
Progress in U.S. / China trade negotiations was evident in the latest week, as China agreed to cut tariffs on U.S. autos, and increase purchases of soybeans and energy. Still, the political maneuvering around the Canadian arrest of the Huawei CFO kept the markets on edge. This tension was further complicated by fresh allegations that China is responsible for hacks on U.S. companies and have stolen military secrets. Continued tangible progress on the trade front is essential given the controversial back stories related to hacking and arrests.
The trade negotiations between the world’s two largest economies are important factors affecting the pace of global growth and market performance. Via Nova believes that any substantive trade deal between the U.S. and China will serves as a template for China’s future negotiations with the EU. A trade deal could be a major positive market catalyst for U.S. and especially the moribund global markets.
The Week Ahead: The FOMC meeting will be the focus. Government shutdown?
The decisions by the Federal Open Market Committee (FOMC) on Wednesday will likely be the focus of the week. Via Nova expects the FOMC to raise the federal funds rate range by a quarter percent to 2¼%- 2½%, as they have communicated, but they will “pause” further increases to assess the various risks facing the economy considering continued low inflation. The pause in interest rate hikes could last six to nine months while the uncertainties surrounding trade, housing and slowing global growth are addressed. The post-meeting press conference with Chairman Powell should yield important clues to the FOMC’s expectations for 2019. Data on struggling housing starts, durable good orders and personal income are also scheduled.
The federal government will try to resolve spending issues to prevent a government shutdown before Christmas.The lightning rod issue appears to be border wall funding, but political negotiations are often much more complicated than that.The pressure is high for Republicans to come up with a compromise, since a stopgap funding measure into early 2019 would allow the Democratic-controlled House to exert considerable influence on a final budget.