Equity, high yield, and loan markets continued their recovery last week off the late December lows. U.S. stock markets posted 2%-3% gains on a decent start to fourth quarter earnings season, some rumors of trade negotiation progress, and a further recovery in oil prices. The British Parliament voted to reject the negotiated Brexit deal leaving ‘stay’, ‘extend’, ‘hard Brexit’, or a new referendum as the only remaining options. The record 29-day government shutdown continued last week but still remains a marginal economic and fundamental consideration at this stage.
- After a December to remember (or forget), we’re now looking at the sixth strongest start (+6.5%) to the S&P 500 on record and we’ve moved from the fourth worst 10-day A/D reading in late December to a near record high (overbought?).
- The percentage of stocks trading back above their 50-day moving average is back up to 67%, a healthy breadth reading. The worst performing stocks during the December selloff have been the best performers in January, specifically those higher valuation/growth stocks (FANGs) .
- The Bespoke Beige Book Index is signaling that U.S. economic growth is on a decelerating path with a downtick similar to 2011-2013.
- High yield spreads have plummeted over the past couple of weeks from a top tick of 544 to under 440 Friday.
- Fed funds futures have calmed down from early January recoil and are now pricing in a 65% probability of no hike and a 25% probability of one hike.
- The Brexit vote was rejected by British parliament and a subsequent no confidence vote on Theresa May failed. Opposition leader, Jeremy Corbyn, is refusing to engage May on changes to the Agreement and seeks either a new referendum or new general election.
- The lack of support of the Commons leaves a hard Brexit or last-minute revocation of Article 50 as the two most likely outcomes at the moment.
- Eurozone inflation does not appear to be softening in response to weak economic activity. Core Eurozone inflation has remained 0.9%-1.1% range on a 3m/3m basis - certainly no justification for a tightening of ECB monetary policy.
- 4Q earnings are underway. This will be the last quarter where the yoy hurdle does not reflect the corporate tax cut (35% to 21%). It is estimated that consensus 13% 4Q earnings growth would still register a healthy 7% without the cuts.
- Goldman Sachs earnings report revealed $467b in tax cut benefits in the fourth quarter alone and a 16.2% effective rate with next year expected to rise to 22%.
- It’s early (< 100 reports) but the earnings beat rate is 69% but the revenue beat rate is only 49% - worrying top line results worth noting.
- U.S. homebuyers appear to be aggressively buying the dip in interest rates evidenced by mortgage applications spiking over the past two weeks to levels not seen since 2010. This along with later Q4 national housing market data points are signaling improvement for the sector.
Economic Release Highlights
- December PPI fell 0.2% largely due to falling energy prices (-5.4%). The core reading was also soft at -0.1%. This report is not pointing to building price pressures.
- The January U.S. housing market index (58) beat consensus estimates, posting its first increase since October and only the second increase since May 2018.
- The preliminary UofM Consumer Confidence Index plunged to 90.7 (97.0 expected) in what likely reflects December market volatility and perhaps the first threads weakening tied to the government shutdown. The gauge has now given back all its gains since the 2016 election.
- December industrial production hit the consensus estimate of 0.3%. Strong production across manufacturing (vehicles, mining, construction, business equipment) was evident while utilities slowed sharply due to unseasonably warm weather.
- January Philly Fed broke a trend of three consecutive declines, beat expectations, and increased to 17. We’re in the midst of 32 consecutive positive months, the second longest streak on record. The earliest arrival of recession after a lengthy positive streak is 15 months.
- Weekly jobless claims of 213k began to show the effects of the government shutdown. There was a 5,694 weekly increase to 10,454 claims filed by Federal employees. This level is up from 1,148 at this time last year. in a rise that very likely reflects furloughed workers from the government shutdown.
- The seasonally adjusted reading has now stayed below 250K for 67 straight weeks. Claims have also come in below 300K for 202 consecutive weeks.