The holiday shortened week started soft with gloomy Brexit narratives, a downbeat IMF growth forecast, and a slow GDP report from China. Of note was that the down draft was on weak volume and equity markets went on to recover most of their losses in the back half of the week on earnings, encouraging trade narratives, and dovish narratives from both the ECB and Fed. The S&P 500 now sits 8.5% below its 9/20 high, a big improvement from the -19% low point on Christmas Eve.
- POTUS and the U.S. Congress reached a deal to reopen the federal government, at least through February 15th. The 34-day shutdown eclipsed the previous record of 21 days in 2013.
- Fed officials made clear that revisiting both pace and scope of Fed balance sheet reduction is very much under deliberation which markets applauded.
- The ECB kept its interest rate and bond reinvestment policy unchanged and ECB President Mario Draghi followed with clearly worded dovish comments at the Davos Global Economic Forum.
- The pound (GBP £) is one of the best indicators for (+/-) Brexit outcome and it rallied sharply last week although overall confidence survey numbers are falling sharply. We are viewing Brexit through a binary lens (no-deal BAD or anything else GOOD) as we monitor risks overseas.
- The latest rumor is that British Parliament is discussing seeking an extension through June which would require EU approval.
- U.S. earnings season hits full stride next week, but things are beginning to take shape. Earnings (+11%), forward guidance, earnings beats (64.7%) and revenue beats (54.9%) are coming in lower than recent quarters but stock prices are reacting positively on announcement day.
- The IMF reduced 2019 global growth forecast from 3.7% to 3.5% and China reported 6.6% growth in 2018, its slowest growth since 1990.
- 2018 fixed investment in China fell to 5.9% from 7.2% in 2017 largely due to government attempts to curb credit expansion.
- Bespoke noted the LEI/CEI ratio, which does give some false positives, is beginning to flash yellow. It is down 75 bps from its peak over the past three months. The decline in this metric has led the past three recessions by 2 years and 11 months on average.
- Current S&P 500 valuation (trailing P/E) of 17.9x isn’t as pronounced as this time last year (23.7x) but is still premium to the average of major non-U.S. markets (15.1x). Globally, premium markets include India (25.1), Brazil (21.2), and Switzerland (21.2) while Russia (5.7), South Korea (10.2), and Hong Kong (10.3) are on sale.
- ICI mutual fund flows confirmed the retail market ‘capitulation’ we felt was occurring in late December with data showing mutual fund outflows across all major asset classes surpassing what we saw at the depths of the 2008/2009 GFC.
Economic Release Highlights
- Existing home sales fell 6.4%m/m (10.3%y/y) in December, despite a fall in mortgage rates which peaked in November. Rates have fallen approximately 0.40% to 4.75% on a 30yr mortgage loan.
- Markit U.S. manufacturing and Services preliminary January PMIs were healthy at 54.9 and 54.2.
- Global PMIs confirmed continued weakness overseas with Eurozone (50.5), Germany (49.9), and Japan (50) all teetering on contraction territory. European readings were the slowest in 6 years.
- German IFO Expectations (sentiment) registered its lowest reading since Draghi’s ‘whatever it takes’ moment.
- Not since 1969 has a weekly jobless claims number come in with a ‘1’ handle, until this week. 199k is the lowest reading in over 50 years - back when the workforce was less than half the size it is today. Current weekly streaks are 203 consecutive weeks below 300k, 68 consecutive weeks below 250k, and now 1 week below 200k.