It was a choppy week for equities with the S&P 500 eking out a gain for a tenth straight – now the best two-month start for the S&P 500 in 32 years (1987). Positive news coming from China on both fiscal policy and trade negotiations were supportive as was Fed Chairman Powell testimony acknowledging a moderately favorable U.S. backdrop with ‘some crosscurrents and conflicting signals.” Yields moved notably higher last week with the 10yr (2.76%) now up over 0.20% off the January 3 low. The curve slope briefly dipped below 0.20% last week as well.
- The U.S. announced a delay to the March 1st deadline for a U.S.-Sino trade agreement and corresponding tariff sanctions citing significant progress made over the past week. Market expectations are that the countries will formalize an agreement in the coming weeks.
- U.S. equity market volatility, which peaked above 36 in late December, has fallen back below 14 where it spent most of 2018.
- The European Commission expects a positive fiscal thrust across the Eurozone of 0.40% of GDP in 2019, up from 0.05% in 2018.
- British PM Theresa May promised a vote between a no deal Brexit or a delayed departure from the EU if lawmakers reject her revised Brexit deal on March 12th.
- Hot U.S. job market? 100 consecutive months of job creation, more job openings than job seekers, decades low 4% unemployment level, and increasing wages.
- European unemployment in January hit 7.8%, its lowest level since 2008. France (8.8%), Germany (3.2%), Spain (14.1%), Italy (10.5%), and overall youth (16.5%) are the key drivers.
- The first two months of Q1 saw a 6.5% cut to Q1 S&P 500 earnings estimates. Average front two-month guidance over the past 10 years has trimmed estimates by 2.6% each quarter.
- Morgan Stanley estimated that nearly 45% of the investment grade bond market may be considered sub investment grade based solely on leverage levels.
- Despite much attention on rising public debt levels, only Brazil, Turkey, and South Africa stand out with vulnerable fiscal positions given borrowing rates above nominal GDP growth. China is the largest positive outlier with GDP growth far in excess of borrowing rates - albeit SOEs and local governments have been the biggest issuers.
Economic Release Highlights
- The long delayed 4Q GDP report revealed solid 2.6% growth (2.9% 2018). 2018 GDP matched 2015 as the highest growth years since the GFC.
- Despite the weak December retail sales report, consumer spending grew 2.8%, down from the two prior quarters (3.5%, 3.8%) but still respectable. Business spending of 6.2% was strong but residential investment (-3.5%) turned in a fourth consecutive quarterly decline (housing mkt).
- December PCE price data (govt shutdown delay) remained subdued with headline and core at 1.7% and 1.9% respectively. Income data revealed wages and salaries up 0.5% and 0.3% in Dec/Jan while personal income was +1% in December and softened 0.1% in January.
- February PMI Manufacturing Index fell 1.9 to 53.0 and ISM Manufacturing fell 2.4 to 54.2, both confirming slower manufacturing sector momentum which became evident toward year end.
- February consumer sentiment bounced back to 93.8, up from the government shutdown window but still 4.5 short of December levels. Of note were sizable decreases in 1yr (2.6%) and 5yr (2.3%) inflation expectations.
- December housing starts fell -11.2% - the worst miss relative to expectations in over 12 years, but housing permits (+0.3%) and January pending home sales (4.6%) both easily exceeded expectations.
- China’s February CFLP manufacturing PMI (49.2) was below 50 for a third consecutive month. Their CFLP nonmanufacturing PMI reading was a more respectable 54.2.
- Japan’s PMI Manufacturing Index registered 48.9, the first time since August 2016 it has fallen below 50.