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Weekly Market Review – 2/25/2019

Equity markets moved higher last week on dovish Fed narratives, abating trade tensions, and a strong finish to fourth quarter earnings (blended +13.1%). Small caps (R2000) are in the midst of their longest weekly winning streak since 1996 and the year to date starts for the DJIA and S&P 500 are their best since 1987 and 1991 respectively. Oil continued to rally, now up over 25% on the year while interest rates and the yield curve slope both declined - the yield curve slope is now under 0.20%.

 

Market Anecdotes

  • FOMC minutes of the January meeting, in which guidance was materially altered, did not present any new information. Strength in labor market, manufacturing, household spending, and business investment were countered by concerns over non-U.S. growth, residential investment, balance sheet runoff, and the government shutdown.
  • Reports of Memorandums of Us regarding forced technology transfer, cyber theft, intellectual property rights, currency, agriculture, and non-tariff trade barriers confirmed tangible progress on U.S.-Sino trade talks.
  • If Teresa May can get her deal, or a version of it, past House of Commons, it is thought the EU may grant an extension request of 3 months at their upcoming summit in late March.
  • The PBOC announced a banking system support measure ($222mm) - a 1yr bills swap to provide liquidity for bank perpetual bonds.
  • Spain’s foreign minister indicated a new Brexit deal is being worked out in Brussels as PM May traveled there to push negotiations forward.
  • An ECB board member floated the idea of another round of loans to banks in advance of next year’s TLTRO maturities, indication that the ECB spigots may open back up again.
  • Something of note is that IG spreads are approximately 4bps higher now than at the beginning of February while equity markets are up 3%-5%.
  • The past two weeks have seen U.S. oil imports fall below 4mbpd, a level not seen since the 90’s which highlights the growing importance the U.S. is to supplying the global oil markets. Domestic production has risen 50% (8mbpd to 12mbpd) over the past 5 years.
  • PMI weakness/slowdown is not limited to the U.S. PMIs for Japan (48.5), Germany (52.7), and EZ (51.4) all came in at relatively sluggish or contractionary levels. Weakness was most pronounced across the manufacturing sector.
  • Strong market breadth is clear with cumulative A/D at a new record high, a rapid strengthening in % stocks above 50/200 dmas, and in % of stocks at new 52-week highs. The equal weight S&P 500 is outperforming the market cap weighted S&P 500 by nearly 3% year to date.
  • The transportation sector is flashing yellow with Cass Freight volumes (-3.8%) and intermodal rail traffic both slowing down. The LEI/CEI ratio also looks like it may have rolled over.
  • The Barclay Fund Flow Indicator revealed $42.3b in hedge fund outflows, the highest monthly outflow in over 5 years.

 

Economic Release Highlights

  • The 1.2% increase in December durable goods orders was aided by strong airline and auto activity however weakness in core capital goods of -0.7% (November too was revised down 1%) signaled soft business spending and perhaps lower business confidence.
  • The Philly Fed Business Outlook Survey followed other survey measures downward with its first negative reading since May 2016 of -4.1.
  • Flash February PMI Manufacturing (53.7) softened 1.2 points while Services (56.2) came in well above expectations. The composite PMI registered a still healthy expansionary 55.8.
  • January Existing Home Sales (-1.2%m/-8.5%y) came in on the low end of the consensus range despite discounted prices as median prices fell 2.8% to $247,500.
  • A 62 (+4) reading on February Housing Market Index (homebuilder sentiment) was up for a second consecutive month and handily beat expectations. Lower mortgage rates were likely a positive force behind the number.

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