It was an up then down week for the stock market. Bond yields fell in sympathy with soft risk markets on what look like eleventh hour resolutions, at best, to looming March 1st (U.S.-China trade) and March 29th (Brexit) deadlines. The U.S. had a relatively light but constructive economic calendar last week while non-U.S. economic releases exuded more concern. Discouraging mid-week U.S.-Sino trade negotiation anecdotes added to the likelihood of additional tariffs on March 1st.
- Larry Kudlow noted that U.S.-China trade negotiations are still a ways off, putting a volatility charge into the equity markets on Thursday. It now seems unlikely that POTUS and Chinese President Xi meet before the March 1st trade truce deadline.
- The looming government shutdown February 15th is likely to be averted with a POTUS declaration of a national emergency which BCA geopolitical analysts suggest will be upheld by SCOTUS.
- A recent Strategas analysis suggested 2019 incremental fiscal stimulus of $122b and, depending on the range of outcomes, incremental 2019 tariff (tax) projections of $50b-$215b.
- Fading concerns of the Fed choking off economic growth have driven high yield bonds to their best start since the GFC, now up nearly 5% in 2019.
- With 66% of S&P 500 companies reporting thus far, yoy 4Q earnings growth is tracking at 13.3%, what would be five consecutive double-digit growth quarters. Forward guidance has been revised sharply downward with Q119 now in negative territory (-0.8%).
- Stocks have been reacting more positively to their earnings reports than any period since Q1 2009. A reflection of U.S./non-U.S. momentum is that companies with less than 50% of non-U.S. revenue are reporting 2x earnings growth compared to multi-nationals.
- USD strength is being singled out for misses in 4Q reports. The ICE Dollar Index moved 10% from (Feb) low to (Nov) high during 2018 and was 3% higher in 4Q than the remainder of the year.
- An article in the Financial times reported that AQR sees the next decade of real returns on a 60/40 portfolio averaging 2.9% (5% long-term average) while perma-bear GMO is forecasting negative real returns over the next 7 years.
- BCA noted this week that the private sector financial balance (earnings versus spending) is currently a 2.1% surplus (of GDP) - the two prior recession began in private sector deficits.
- BCA noted this week that unemployment fell below NAIRU in 1964 but it took 4 more years for inflation to rear its head.
Economic Release Highlights
- The January ISM Non-Manufacturing index registered 56.7, right on consensus and one point lower than December but one we would categorize as a healthy growth reading.
- The Citi U.S. Economic Surprise Index has moved into positive territory and the NY Fed Q1 GDP estimate was revised higher to 2.4%.
- January Global PMIs confirmed sluggish non-U.S. growth as the Global PMI feel to 50.7. Europe (50.5) weakened for a sixth consecutive month and sits at 2+ year low. Slow growth in China (48.3) seems to be impacting its trading partners. A constructive reading from the U.S. (56.6) has been the hallmark of the global economy over the past 2 years.
- December German industrial output fell 0.4% m/m unexpectedly (-3.9% yoy), far short of the 0.3% expected growth. Whispers of potential recession in Germany are coming to the forefront.
- The EU reduced its 2019 GDP estimate from 1.9% to 1.3% wherein Italy’s projection fell from 1.2% to 0.2% growth.