Two of three (oil, China, Fed) key drivers of market volatility over the past several weeks worked to soothe markets last week. A market friendly Fed narrative (Fed pause?) and rising hopes of a deescalating trade conflict (trade truce?) drove the S&P 500 and NASDAQ to their best week in seven years, yet both remain below the level only 13 trading days ago and nearly all U.S. indices remain below their 50DMAs. Growth stocks particularly appreciated the relatively dovish tone from Chairman Powell which lit a fire under risk assets.
- Slowing global growth, plunging oil prices, falling equity prices, widening spreads, and a strong dollar are reminiscent of 2015. Then, as the Fed geared up for its hiking cycle and other banks remained in ultraaccommodative mode, the USD rallied 16% between July 2014 and March 2015. How China, the Fed, and oil markets play out relative to 2015 are key considerations.
- In a speech on Wednesday, Fed Chairman Powell signaled that rates were “just below” normal, signaling a December hike remains likely but they’ll be data dependent from there forward. However, we note that the range he referenced remains wider that markets initially appreciated.
- A significant Powell Fed protocol change announced in November is that he will convene a press conference following each of the eight FOMC meetings, opening all eight meetings to potential policy shifts, as opposed to only quarterly pressers for the past several decades.
- High profile G20 meetings in Buenos Aires began on Friday. Before the start, a new NAFTA was signed which now moves toward an uncertain U.S. Congress. On Saturday, the U.S. and China agreed to a critical ceasefire on additional tariff increases, a welcomed move. The U.S. and Europe continue to negotiate trade issues with the auto industry in the crosshairs.
- In the span of just 40 trading days, WTI traded at a multi-year high and then proceeded into one of the largest drawdowns on record. While crippling to energy stocks, the oil crash has been helpful to inflationary concerns with prices at the pump down nearly 15% since early October.
- The Dallas Fed noted that $50 oil is a key support level for new U.S. well economics. Meanwhile, Saudi Arabia is keenly aware they need crude to trade over $80 to balance their budget.
- Energy company balance sheets are in notably better shape than in 2015. Huge productivity improvements enabled shale producers to increase production to record levels without incurring substantially higher costs - energy capex to GDP is far lower today than what it was in 2015.
- The BoE and Treasury released analysis of different E.U. withdrawal scenarios last week, highlighting openness and preparation aspects which should be helpful for PM May’s withdrawal case.
Economic Release Highlights
- October personal income (0.5%), consumer spending (0.6%), and PCE inflation of 0.1% were encouraging. Headline and core PCE remained modest at 2% and 1.8% respectively.
- Q3 GDP revision maintained the 3.5% level previously announced. A strong inventory build and robust consumer spending (3.5%) were additive while business investment slowed down off the tax cut driven first half 2018 levels.
- November U.S. consumer confidence ticked down slightly to 135.7, still not far from the all-time high of 144 reading back in 2000.
- October (m/m) new home sales fell 8.9% and home prices fell 3.6%. Prices are -3.1% year over year, bolstering the view that housing has clearly been one of the biggest economic disappointments in 2018.