The equity market rally continued last week on the back of mid-level trade negotiations, renewed ‘patience’ at the Fed, and recovering oil prices. After declining close to 20% in the span of three months, the S&P 500 has rallied over 10% in just twelve trading days and credit spreads across high yield bonds and loans have plunged. Easing in the U.S. dollar, interest rates, and Fed outlook all played into the rally.
- FOMC minutes revealed a dovish conversation as a “few” of the 17 members didn’t want to raise rates at the December meeting due to the absence of tangible inflation with remaining members appearing cautious with respect to additional hikes.
- Federal Reserve Vice Chairman Richard Clarida and six regional Federal Reserve bank Presidents hit the speaking circuit last week with patience and flexibility the new mantra. Rates may have gotten carried away - Bianco's Fed Speak Monitor suggests their tone was much less dovish than the market.
- The government shutdown hit a record 21 days on Friday and the Senate will not take up the bill passed by the House to reopen the government. While this is no small issue to those workers deferring income, it is still several weeks away from becoming a macro issue.
- U.S.-Sino trade delegations met early last week with some modestly constructive anecdotes emerging. A U.S.-Sino trade resolution is quickly becoming a key macro event in 2019. Late January follow up meetings are scheduled. A breakthrough could very well spark a market rally.
- Chinese credit impulse has begun to move up meaning credit is slowing at a diminishing pace. Typically, this indicates a bottoming in Chinese growth with a possible bounce in commodity prices, EM outperformance, and a softening of the U.S. dollar.
- 4Q earnings season begins on Monday. 4Q S&P 500 earnings forecast is for 11.4% which would be a fifth consecutive double-digit quarter.
- As equity prices have picked back up, so too has bullish sentiment. AAII bullish sentiment moved up to 38.5%, right in line with the historical average.
- Oil prices jumped over 7% on an OPEC commitment to restore balance in supply and demand. Saudi Arabia has already achieved its pledged production cuts and stated it needs $80 oil to balance their budget.
- The energy capex decline in response to the decline in oil prices is unlikely to be as pronounced as 2015 because energy fixed investment levels are notably lower (less scope to decline) today than 2015 as a percent of GDP. Also, Saudi Arabia is not likely to respond in the same way by attempting to bankrupt Iran and U.S. shale producers.
- PM Theresa May set a date (1/15/19) for a Brexit floor vote in Parliament. If passed, the UK leaves in March. If rejected, the UK can ask the EU for more time, make modifications and vote again, leave without an agreement (hard Brexit), or May could withdraw Article 50 altogether, which an EU court has authorized.
- A hard Brexit scenario will see the Sterling fall over 20% and likely have significant supply chain and economic consequences.
- The weak housing market may get a reprieve given the pull back in mortgage rates. Record low vacancy rates and a record aging of U.S. housing stock (most since GD) factor largely.
- U.S. corporate debt is at a record high and underwriting trends have been soft, but interest coverage levels are above historic averages and U.S. leverage is significantly lower than Euro, Japan, and Australia. Also, lenders (bank/non-bank) are much less levered than in prior cycles.
- High yield bond spreads have plummeted over 16% in the largest three-day compression since the GFC and bank loans have reversed over half of the 4Q fall.
Economic Release Highlights
- December CPI fell slightly to 1.9% due to lower energy prices and core CPI remained steady at 2.2%. These tame consumer prices certainly did not raise any urgency at the Fed.
- December’s ISM Non-Manufacturing Index show some welcomed moderation, easing 3.1 points to 57.6. We saw the second strongest new orders reading (62.7) of the past 8 years, particularly from foreign demand, and business activity cooled 5 points to a still lofty 59.9.
- German (1.4%) and Eurozone (0.6%) retail sales were surprisingly robust in November, both handily outpacing consensus expectations and carried upward revisions to prior months.
- The November JOLTS reported a welcomed reduction in job openings of 6.888mm but there remains 870,000 more openings than those actively seeking work. That figure is down from a record 1.096mm in August.