Economic Data Watch and Market Outlook
Last week was event filled, and even the delivery of the articles of impeach by Speaker of the House Nancy Pelosi to Senate Majority Leader Mitch McConnell, did not deter equity markets from reaching new all-time highs. The longest bull market run (3965 days and counting) in history continued to rise on the back of the signing of the U.S./China Phase I deal last Wednesday, January 15th. The deal signed by President Trump and China Vice Premier Liu, has China agreeing to buy an additional $200 billion of goods and services, and $30 billion in agricultural goods over the next few years. Adding to the positive tone was the Senate passing the USMCA agreement which replaces NAFTA which has been in force since 1994. The measure which passed by a Senate vote of 89-10, had strong support from the agriculture, manufacturing, and services sectors, as well as the labor unions. President Trump to expected to sign the agreement next week.
As we enter next week’s trading sessions, the spectacle of the Senate Impeachment trial will begin on Tuesday with Supreme Court Justice John Roberts presiding. Senate Majority Leader Mitch McConnell has already indicated the trail will likely last inside of two weeks, as he believes there is little credible evidence and a quick acquittal is expected. From a fundamental perspective, global equity markets have continued their inexorable rise, which leads us to be cautious short term. The forward P/E for the S&P 500 is above 18 and the VIX is at a complacent level of 12.19 as of Friday’s market close. As we are entering the busy part of corporate earnings season, investors will be looking past the -0.7% expected decline in S&P 500 Q4 earnings expectations and look for clues regarding positive revenue and earnings guidance for Q1 2020 and beyond.
In turning to next week’s economic calendar, in a shortened week due to the Dr. Martin Luther King Jr. holiday, the one data release of note is U.S. Existing Home Sales on Wednesday. The Street estimates existing home sales increased 2.8% to 5.50million units in December. The report would confirm housing indicators continued to firm and sales picked up in December after declining in November. Apart from what is a general upward trend for housing data, the belief is sales in December could have benefitted from the very mild weather during the month.
The Week In Review
U.S. Equities
U.S. equity markets finished at all time highs again, as the signing of the U.S./China Phase One deal, passage of the USMCA through the Senate and positive economic and earnings data pushed equities prices higher.
a) Dow Jones +1.84%, MTD +2.92%, YTD +2.92 b) S&P 500 +1.99%, MTD +3.14%, YTD +3.14% c) Russell 2000 +2.54%, MTD +1.90%, YTD +1.90%
Drivers: I) Residential construction improved in December, as Housing Starts increased 16.9% from the revised November total and were 40.8% above the December 2018 rate. Single family starts had a sizable increase of 11.2% above the revised November figure. Most of the gains in single-family starts occurred in the Midwest. Permits decreased 3.9% from November but were up 5.8% from the December 2018 rate.
II) Retail sales were strong in December, rising 0.3% after climbing an upwardly revised 0.3% in November. Sales excluding vehicle dealers increased a strong 0.7%, up from zero growth in November. Growth was seen across most segments, as the only sectors experiencing sales declines were vehicle dealers and department stores. Growth was led by gasoline stations. Core sales, excluding gas stations and vehicle dealers, rose 0.5%. Other growth leaders included apparel stores and building supply stores.
III) The consumer price index came in a slightly weaker than expected in December, and without signs of inflationary pressures the Federal Reserve should remain on hold. The CPI increased 0.2% in December, weaker than the 0.3% Street consensus had expected. Food prices were up 0.2% following a 0.1% gain in November. The CPI for energy increased 1.4%. Excluding food and energy, the CPI rose 0.1%, also below expectations.
IV) The producer price index for final demand increased 0.1% in December, weaker than the Street consensus. Prices of final demand goods rose 0.3% in December as food prices fell 0.2% and energy prices increased 1.5%. Excluding food and energy, final demand goods prices rose 0.1% in December following a 0.2% gain in November. Final demand services prices were unchanged in December after falling 0.3% in November. Inflation needs to accelerate in order for the Fed to consider raising rates, and that seems remote at the moment.
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, Energy and Materials.
Capitalization: Large Caps +3.20% (YTD +3.20%), Mid-Caps+2.76%(YTD +2.76%) and Small Caps +1.90% (YTD +1.90). Style: Value +0.84% (YTD +0.84%) and Growth +2.47% (YTD +2.47%). Industry Groups: Technology +5.91% (YTD +5.91%), Information Technology +5.81% (YTD +5.81%), Communication Services +5.40% (YTD +5.40%), Industrials +3.56% (YTD +3.56%), Utilities +3.25% (YTD +3.25%), Healthcare +2.57% (YTD +2.57), REITs +2.25%(YTD +2.25%), Consumer Discretionary +2.06% (YTD +2.06%), Consumer Staples +1.36% (YTD +1.36%) Financials +0.90% (YTD +0.90%), Materials -0.48% (YTD -0.48%) and Energy -1.63% (YTD -1.63%).
European Equities
The MSCI Europe index rose last week by +1.15%, pushed higher by positive economic data out of China and the signing of the Phase One trade agreement.
Drivers: I) Euro-zone industrial production rose by 0.2% in November, only partially offsetting the 0.9% drop in October. The primary driver of the increase was a 1.2% increase in capital goods production, but energy production also added after two consecutive months of decline. By contrast, production was lower everywhere else. Across countries, output rose in Germany, France, Italy and Spain, but fell sharply in the Netherlands and Ireland. The euro area’s manufacturing sector is in a major decline and should only gradually recover in 2020,
II) Euro-zone inflation rose to 1.3% in December up from 1.0% in November, its highest since June. Driving the gain was primarily the increase in energy, rising by 0.2% year over year after a 3.2% fall in November. This follows four months of decline, in line with the base effects in oil prices. Food inflation also rose slightly, to 2% year over year from 1.9%. Core inflation held steady at 1.3% year over year, as an expected correction in services inflation offset a marginal increase in nonenergy goods inflation.
III) Performance of European Indexes for the week, month-to date and year-to-date. The MSCI Europe Index was higher by +1.15% for the week (MTD +0.99%, YTD +0.99%).
Asian Equities
Asian equity markets followed the U.S. markets higher, as the US and China signed the Phase One interim trade deal. The Dow Jones Asia Index advanced by +0.81% for the week, (MTD +1.92%, YTD +1.92%)
Drivers: I) China’s retail sales rose 8% year over year in December, maintaining November’s improved pace. There were moderate gains in auto and petroleum spending, a contrast with November, which saw increases in clothing, cosmetics and household electronics spending, the result of the promotions associated with Singles’ Day on 11 November. It is likely that household consumption will keep up this pace in first quarter of 2020, supported by government stimulus to bolster the economy.
II) The Chinese economy maintained its growth at 6% in the fourth quarter, unchanged from the historically low rate in the previous quarter. On a quarter-to-quarter basis, the economy grew 1.5%, unchanged from Q3. This was essentially the Street consensus view, as the Chinese economy faced headwinds due to the trade war and slowdown of global demand. The Phase One trade deal allows China to avoid further tariffs which should help boost the economy in the first half of 2020.
III) Performance of Asian Indexes for the week, month-to-date and year-to-date. The Nikkei was higher by
+0.80% (MTD +1.63%, YTD +1.63%), the Hang Seng Index rose by +1.41% (MTD +3.31%, YTD +3.31%) and the Shanghai Composite declined by -0.54% (MTD +0.83%, YTD +0.83%).
Fixed Income
Treasury yields were higher on the week after the U.S. Treasury decided to float a new supply of 20 Year Treasuries to finance U.S. government spending.
Performance: I) The 10-year Treasury yield was higher last week ending at 1.823% up from 1.822%. The 30-year yield rose last week finishing at 2.282 rising from 2.279%.
II) Performance for the week, month-to-date and year-to-date. The Bloomberg Barclays US Aggregate Bond Index rose +0.06% last week, MTD +0.50% and YTD +0.50%. The Bloomberg Barclays US MBS TR was higher by +0.06% last week, MTD +0.32% and YTD +0.32%. The Bloomberg Barclay’s US Corporate HY Index advanced by +0.27%, MTD +0.71% and YTD +0.71%.
Commodities
The DJ Commodity Index fell last week declining -0.76%, but was higher month to date -1.22% (YTD -1.22%). Commodity prices dropped last week led by energy and agriculture, as markets were skeptical regarding the potential increase in exports to China based on the Phase One deal.
Performance: I) The price of oil slumped last week by -0.52% to close at $58.81 and is lower month to date in January by -3.68% (YTD -3.68%). Oil prices fell for a second straight week, as investors tried to assess the effect on oil demand from the signing of the U.S./China Phase one deal and passage of the USMCA.
II) The ICE USD Index, a gauge of the U.S. dollar’s movement against six other major currencies, was higher by +0.29 ending at 97.64 for the week (MTD +1.29%, YTD +1.29%). The USD rallied on the week, as the signing and passage of the U.S./China Phase on deal and USMCA, engendered hopes for accelerated economic growth.
III) Gold declined last week as investors flocked to risk assets after the signing of the U.S./China Phase One deal. Gold was lower by -0.38% last week, falling to $1557.3 (MTD +2.24%, YTD +2.24%).
Hedge Funds
Hedge fund returns in January are primarily higher with the core strategies Equity Hedge, Event Driven, Macro, Relative Value and Multi-Strategy all in positive territory.
Performance:
- The HFRX Global Hedge Fund Index is higher at +0.95% MTD and up +0.95% YTD.
- Equity Hedge has risen by +0.82% MTD and is up +0.82% YTD.
- Event Driven is higher MTD +0.79% and is up YTD +0.79%.
- Macro/CTA has risen by +1.61% MTD and is up +1.61% YTD.
- Relative Value Arbitrage has advanced by +0.66% and is up +0.66% YTD.
- Multi-Strategy is up MTD at +0.61% and is higher by +0.61% YTD.
Data Source: Haver Economics
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