Last week brought us a very busy calendar of market-oriented events which ultimately drove the stock market higher enabling it to wrap its best January in 30 years. A dovish FOMC meeting, 4Q earnings reports, trade negotiations, and a heavy calendar of economic reports all fed into the narrative. Bond yields moved notably lower in sympathy with a friendly Fed and an overall risk on tone in the markets.
- A dovish Fed, good earnings reports, and encouraging economic reports all fed into a strong stock market last week.
- Last week’s FOMC meeting was extremely dovish. The Fed noted they will halt balance sheet runoff if necessary and removed reference to further rate hikes.
- Fed Chair Powell broke a streak of seven consecutive Fed meeting days met with falling equity markets - which is now a dubious record streak held by Mr. Powell.
- Nearly 50% of S&P 500 companies have reported fourth quarter results. The blended earnings growth rate is 12.4%, up from 10.9% a week ago. The streak of 20%+ quarters is in jeopardy but we are on track to post a fifth consecutive double-digit quarter.
- Analysts expect an earnings decline in Q1 and low single digit growth for the remainder of the year.
- Given the sharp rally in stocks and credit spreads, Bespoke noted a regression of the two which suggests the equity market is currently 2% cheaper than were synthetic credit spreads would suggest but is 4% overvalued relative to cash bond markets.
- U.S. - Sino trade negotiations produced constructive outcomes last week. Follow on meetings between leaders are expected in the next couple of weeks with the March 1st deadline looming.
- Bespoke notes European YTD stock leadership is stemming from cyclicals (autos, financials, industrials, retail, construction) - some notable bullish internals.
- Oil prices recovered more last week as OPEC announced they have achieved 75% of targeted production cuts, the U.S. announced sanctions on Venezuela, and cold weather blanketed the U.S.
Economic Release Highlights
- January ISM Manufacturing rebounded to 56.6 after posting declines in three of the past four months.
- January payrolls surged 304,000, far surpassing expectations. The unemployment rate increased to 4% thanks to government shutdown and increasing participation rates. Average hourly earnings were +0.1% in January and remained unchanged yoy at 3.2%.
- Q4 ECI registered 3.14% with manufacturing, leisure/hospitality, and transportation running high while financial, utilities, and professional wages were subdued. Overall, a higher but manageable trend.
- Global manufacturing PMIs are registering only 51, highlighting a continued soft patch. European auto emission standards and some contractionary readings across EM are factoring in.
- November New Home Sales jumped 16.9% to 657,000, a good sign for 4Q residential investment. This was the largest single month percentage gain since 1992.
- S&P Corelogic Case Shiller HPI has November yoy home prices +4.7%, down 0.3% from October and at a 3½ year low. Notable weakness in key west coast markets was evident.
- January Consumer Confidence was hit by the government shutdown, down 16.2 from November levels, the sharpest fall since 2008. Present situation readings remain near cycle highs but were offset by more pessimistic forward expectations - typical of late cycle readings.
- Widely anticipated GDP and PCE reports were both delayed last week