Economic Data Watch and Market Outlook
In early January we have seen financial markets trading higher on expectations of improved global economic growth, which for now, have offset negative geo-political events. The anticipated signing of the U.S./China Phase One deal has investors looking ahead to an acceleration in global trade, growth and corporate earnings. This has propelled global equities to newall-time highs, which the S&P 500 touched last Thursday. However, the uptrend was interrupted after the U.S. killed Iranian military commander, Qassem Soleimani, which prompted a retaliatory missile strike from Iran. These events sparked the typical “risk-off” reaction where equities declines, while gold, defensive equities, Treasuries and energy all rallied. However, the decline in equity markets and a commensurate rise in volatility (VIX rose by four points at the peak), both reversed themselves as tensions waned and investors bought on the dip.
As we enter next week’s trading sessions, investors will be fixated on Vice Premier Liu He’s visit to the U.S. to sign the Phase One trade agreement. Investors are hoping the completion of Phase One, will lead to the beginning of Phase Two negotiations in China over the next few months. However, expectations for an immediate deal have been dashed, as President Trump has already stated it will probably be after the 2020 Presidential election for a new deal to be completed. Thus, investors will begin turning their attention to corporate earnings season, where Q4 results for the S&P 500 are projected to drop by -0.6% for the quarter versus 2018. We will need a resumption of corporate earnings growth in 2020 for equities to continue their quest to new highs. In the meanwhile, expect bouts of market volatility as Mid East tensions ebb and flow.
In turning to next week’s economic calendar, the primary data releases of importance will be PPI, CPI and US Retail Sales. On Tuesday we begin with the consumer price index, which rose 0.3%, but excluding food and energy, the CPI rose 0.2%, which was below forecast. Based on an analysis of CPI to the core PCE deflator, the Fed’s preferred inflation measure, the core PCE deflator is expected to rise 0.17% in November.
On Wednesday, the producer price index for final demand was unchanged in November, as final demand goods prices were up 0.3% in November, but this was offset by a decline in final demand services prices. The PPI for final demand less food, energy and trade services is projected to be unchanged in November following a 0.1% gain in October.
Thursday’s Retail Sales results could surprise on the upside, as the unusually short shopping period between Thanksgiving and Christmas may have delayed sales into December. After rising just 0.2% in November, the estimate for December is a gain of 0.3%. And on Friday, we close the week with ISM Manufacturing data which fell in November to a 10-year low.Due the negative effects of the on-going Boeing Max Jet issue, the Index is expected to come in between flat to -0.3%.
The Week In Review
U.S. Equities
U.S. equity markets rallied to new all-time highs as tensions between the US and Iran abated, but dropped on Friday after the non-farm payroll increase in jobs created came in below Street expectations.
a) Dow Jones +0.67%, MTD +1.05%, YTD +1.05 b) S&P 500 +0.98%, MTD +1.13%, YTD +1.13% c) Russell 2000 -0.18%, MTD -0.62%, YTD -0.62%.
Drivers: I) U.S. equity markets suffered a number of price declines last week, after a U.S. drone strike killed the Iranian military commander, Qassem Soleimani. Equities dropped further as Iran launched missiles in a retaliatory strike against U.S. personnel housed in Iraqi military bases. After the missile launches, it was assessed that no U.S. military personnel were harmed, and both the U.S. and Iran called for a cease to further military action.
II) Non -farm payrolls increased by 145,000 jobs in December, below the Street estimate of 160,000, while the unemployment rate was unchanged at 3.5%. Revisions to previous months were minor and the labor market remains solid, though it slowed in 2019. Retail was strong, partly due to the seasonal effect of the late Thanksgiving, as well as healthcare and leisure/hospitality. Detracting from job growth were manufacturing, transportation and warehousing, which reflected the slowing conditions in the industrial sector.
III) Average hourly earnings eked higher by 0.1% in December, after rising 0.3% in each of the previous two months. On a year-over-year basis, average hourly earnings rose by the smallest amount since July 2018. But, for the year as a whole, the U.S. economy added 2.1 million jobs with an average monthly gain of 176,000 jobs. Those are solid numbers, but below the 223,000 monthly average seen in 2018.
IV) The U.S. nonmanufacturing sector ended 2019 higher, as the ISM’s composite index increased from 53.9 in November to 55 in December. The reading was above the Street’s consensus forecast; however, the improvement was largely because of a rise in production. The indexes for new orders,employment and export orders all declined over the month, though they remained above the neutral 50 mark.
V) Equities Month to Date are higher with Large-Cap, Growth, Technology and Info. Technology leading equity price performance. The laggards on the year are Small-Cap, Value, Materials and Consumer Staples.
Capitalization: Large Caps +1.18% (YTD +1.18%), Mid-Caps +0.46%(YTD +0.46%) and Small Caps -0.62% (YTD -0.62). Style: Value –1.47% (YTD -1.47%) and Growth +0.08% (YTD +0.08%). Industry Groups: Technology +2.87% (YTD +2.87%), Information Technology +2.81% (YTD +2.81%), Communication Services +2.48% (YTD +2.48%), Industrials +1.51% (YTD +1.51%), Healthcare +0.86% (YTD +0.86), Consumer Discretionary +0.75% (YTD +0.75%), REITs -0.21%(YTD -0.21%), Financials -0.25% (YTD -0.25%), Utilities -0.47%(YTD -0.47%), Energy -0.52% (YTD -0.52%), Consumer Staples -0.54% (YTD -0.54%) and Materials -3.10%(YTD -3.10%).
European Equities
The MSCI Europe index fell last week by -0.28% as economic data shows signs of bottoming, but Eur0-zone manufacturing continues to be in recession.
Drivers: I) German industrial production rose by 1.1% month over month (m/m) in November, but was 2.7% lower than in the same month in 2018. Some good news was that October’s figures were revised up; production fell only 1.0% m/m and 4.7% year over year, versus 1.7% and 5.3% previously. Capital goods output rose the most, by 2.0% m/m, while consumer goods increased 0.5%. Intermediate goods output declined 0.8% m/m. This marked the 13th month of annual declines in German industrial production.
II) Euro zone retail sales easily beat expectations in November, growing 1.0% m/m after falling by 0.3% in October. Sales were supported by a 1.4% m/m increase in nonfood products such as clothing and footwear, and electrical goods and furniture. Only sales of automotive fuels decreased, by 1.0% m/m. Sales in Germany made a healthy recovery from October as did those in Belgium, France, and to a lesser extent Spain. Solid consumer fundamentals kept households spending and is projected to continue in December.
III) Performance of European Indexes for the week, month-to-date and year-to-date. The MSCI Europe Index was lower by -0.28% for the week (MTD -0.16%, YTD -0.16%).
Asian Equities
Asian equity markets were positive on the week, following U.S. equity markets higher as tensions between the U.S. and Iran receded. The Dow Jones Asia Index advanced by +0.79% for the week, (MTD +1.10%, YTD +1.10%)
Drivers: I) China’s headline CPI inflation was 4.5% y/y in December, unchanged from November. Though still hovering near record levels, the dramatic rise of pork prices, which has been driving the inflation, has stalled at least temporarily. Government efforts to increase the supply of pork has been a relief to households, just in time for the Chinese New Year which falls in late January this year. As a result, food price inflation fell to 17.4% y/y from 19.1% in November, and nonfood price inflation rose slightly to 1.3% from 1%.
II) Japan’s consumer confidence continued to counter predictions for a deterioration in consumer sentiment, as the aggregate confidence index improved to 39.1 in December. This is the highest reading in the last six months and is up from 38.7 in November. Gains were fairly widespread, with the subcomponent for the desire to buy durable goods jumped by a solid 1.3 points on a monthly basis. The latest reading suggests that domestic spending is likely to pick up in the months ahead, and consumer’s may have already adjusted to the higher sales tax regime.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by +0.82% (MTD +0.82%, YTD +0.82%), the Hang Seng Index rose by +0.83 (MTD +1.87%, YTD +1.87%) and the Shanghai Composite gained +0.66% (MTD +1.59%, YTD +1.59%).
Fixed Income
Treasury yields climbed higher on the week as tensions between the US and Iran dropped following a de-escalation of military action, and the U.S. jobs data came in below expectations.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.822% up from 1.789%. The 30-year yield rose last week finishing at 2.279 rising from 2.246%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index fell -0.09% last week, MTD +0.45% and YTD +0.45%. The Bloomberg Barclays US MBS TR was higher by +0.11% last week, MTD +0.26% and YTD +0.26%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.23%, MTD +0.43% and YTD +0.43%.
Commodities
The DJ Commodity Index fell last week declining -1.07%, but was higher month to date -0.46% (YTD -0.46%). Commodity prices declined as energy prices dropped as military action between the U.S. and Iran receded.
Performance: I) The price of oil slumped last week by -6.21% to close at $59.12 and is lower month to date in January by -3.18% (YTD -3.18%). Oil prices dropped precipitously as industry data showed a large rise in crude reserves in the U.S., and as Mideast tensions saw some apparent easing.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.49 ending at 97.35 for the week (MTD +1.00%, YTD +1.00%). The USD rose last week as a signing of the Phase One trade deal could accelerate U.S. economic growth and perhaps a rise in interest rates.
III) Gold rallied last week in a reaction to a disappointing December U.S. Non-farm payroll report. Gold was higher by +0.51% last week, climbing to $1563.2 (MTD +2.63%, YTD +2.63%).
Hedge Funds
Hedge fund returns in January are primarily higher with the core strategies, Event Driven, Macro, Relative Value and Multi Strategy in positive territory, while Equity Hedge is lower.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.42% MTD and up +0.42% YTD.
- Equity Hedge has fallen by -0.05% MTD and is down -0.05% YTD.
- Event Driven is higher MTD +0.62% and is higher YTD +0.62%.
- Macro/CTA has risen by +0.92% MTD and is up +0.92% YTD.
- Relative Value Arbitrage has advanced by +0.35% and is up +0.35% YTD.
- Multi-Strategy is up MTD at +0.33% and is higher by +0.33% YTD.
Data Source: Haver Economics
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