A mixed bag of global economic releases along with a little noise surrounding U.S.-Sino trade negotiations pushed the S&P back below its 200 dma on its worst 1-week performance of the year (-2.16%), albeit on relatively low volume. The U.S. delivered decent housing market data and robust wage gains but offset that with a weak NFP report. Meanwhile, China’s trade data, both imports and exports, were bleak.
- China reported a 34% decline in purchases from U.S. markets since last October’s escalation of trade tariffs, likely part posture and part tangible global slowing. December’s U.S. trade deficit of $59.8bn contributed to what was a decades’ high 2018 deficit.
- Chinese buyers have clearly shifted away from buying U.S. non-manufactured goods (ag) which have fallen 75% since March 2018. Ironically, since January 2016, the U.S. trade deficit as % of GDP has deteriorated from its narrowest in a decade to a near record low.
- Factor analysis of the S&P 500 through February illustrates some clear mirror images of 2018. Small cap over large cap, low P/E over high P/E, and heavy international revenue over light international revenue are all pronounced trends YTD in 2019.
- Bespoke pointed out that while the S&P broke through its 200 dma technical support level, UST yields held firmly above the 2.61% support level it has held since early January.
- Late day price action has been very constructive since the 4Q selloff which historically is reason for optimism. The Bespoke smart money indicator and fund flows suggests retail investors have not participated in the recovery rally.
- Having been revised sharply lower, current Bloomberg Q1, Q2, Q3, and 2019 S&P 500 operating earnings estimates are -2.85%, 1.31%, 2.64%, and 5.33% respectively.
- While inflation expectations have rebounded from depressed early January levels, 5yr (1.85%) and 10yr (1.96%) U.S. breakevens remain well below levels seen throughout most of 2018.
- The ECB delivered a dove by signaling no rate hikes for the remainder of 2019 and a new lending facility for EZ banks to launch in September. Markets saw this as validation for growth concerns.
- The ECB and BoE announced FX swap lines with each other to provide liquidity around the upcoming Brexit period.
- The BIS global credit report revealed a slowdown in non-financial credit to 2.1% yoy, the slowest level since 2013 with the private credit growth of 2.7% at its lowest level since Q116.
- Biotechnology stocks sank last week after Bloomberg reported FDA Commissioner Scott Gottlieb is resigning.
Economic Release Highlights
- February NFP had the unemployment rate at 3.8% (16yr low) but added only 20,000 jobs, far below the 175,000 expected. The government shutdown and severe weather likely factored into the alarming headline number. We remain in the midst of a record 209 consecutive weekly jobless claims under 300k.
- Average hourly earnings reached a new cycle high and 3m/3m non-supervisory/production wages grew at a 3.4% annual rate.
- February ISM Non-Manufacturing Index jumped 3.0 to 59.7 on the back of strong export demand and new orders. Service exports are a big component of the U.S. economy.
- February EZ PMI Composite improved slightly to 51.9, PMI Services moved up to 52.8, a 3mo high, and business confidence measures moved up to a four-month high.
- EZ January Retail Sales also improved to 1.3%m/2.2%y levels from a slump in December.
- February housing starts spiked 18.6% MoM aided by an increase in single family starts of 25.1%. This was the biggest monthly increase since March 1979 and the third largest on record.
- New Home Sales jumped 3.7% in December (621,000 annualized), a strong monthly number in a rash of weaker housing releases. The annualized rate (-2.4%) is still in the negative column.
- December construction spending fell 0.6% unexpectedly taking annual growth down to a mere 1.6%, the slowest rate in over 3 years. Residential construction fell 1.4% while non-residential construction managed a 0.4% gain.