Last week saw both U.S and global equities rally over 2.5% sharply in the absence of a clear upside catalyst. Commodities and bonds edged higher and the USD lost ground versus most major currencies, most notably the British Pound (+2.11%). In the U.S. we did see several important economic releases while there were several newsworthy items across non-U.S. markets which garnered much attention including Brexit developments, Chinese policy announcements, the unfolding global crisis at Boeing, and yet another heartbreaking mass shooting.
- Last week saw UK PM May’s Brexit deal rejected a second time followed by a rejection of a ‘no-deal’ Brexit (312-308), followed by an approval to request a delay for Brexit from the European Commission. All 27 EU member countries must approve the request for extension. There is an EU member summit on March 21st, 8 days before the March 29th deadline.
- No material developments on U.S.-China trade negotiations other than indications that the Trump - Xi ‘culmination’ summit is pushed back to at least April.
- China indicated cuts in both interest rates and required reserves are under consideration, helping to push Chinese stocks up 1.3% for the week. They also passed legislation enhancing rights of foreign corporations as part of the market reform initiatives being advanced.
- One notable impact of the early January pivot by the Fed is that short-end real yields have collapsed, evidenced by 2yr real yields falling from 1.9% to 0.8%.
- Spot oil, up 4.3% last week, and forward swap prices have now risen comfortably above the $20-$50 range of breakeven prices for Permian shale production. Aggressive Saudi production cuts and lower production in Iran and Venezuela are supporting the rally.
- The February NFIB small business survey had a record high 10% of companies cite labor costs as their most important problem. Labor shortages were also noted as 22% (near record high) of companies cited labor quality as their most important problem.
- A report by Goldman Sachs noted 2018 S&P 500 stock buybacks jumped 52% to $819b with expectations that figure will grow to $940b in 2019. Business capital expenditures also increased 13% last year to $1.1 trillion with expectations for 9% growth to $1.2t in 2019.
Economic Release Highlights
- January retail sales increased a mere 0.2% but both core readings (ex-autos & gas 1.2%, core 1.1%) posted strong rebounds off the outlier weak December of -1.6%.
- February headline and core CPI (1.5%, 2.1%) both came in at consensus. Soft housing and medical prices contributed to the report which probably doesn’t sound any alarms with the Fed.
- January durable goods came in much higher than estimates (0.4% v -0.6%) thanks to a surge in aircraft. Ex-aircraft was flat, but core capital goods jumped and beat expectations (0.8% v 0.1%). U.S. PPI edged 0.1% higher in February after 3 months of declines but did miss expectations and was pretty weak overall despite a 1.8% increase in energy prices.
- February NFIB Small Business Optimism (101.7 v 102.5) didn’t bounce back as much as hoped from the large drop in January (-3.2) due to the government shutdown and trade conflict.
- January new home sales (607K) came in at consensus. The monthly rate was -6.7% but the overall trend and 3m average are moving higher in what is a relatively volatility monthly series.
- February’s industrial production number inched up 0.1% thanks to weather related boost from utilities. The manufacturing component (-0.4%) fell for a second consecutive month which last happened in mid-2017. The report served to confirm the Fed’s cautious/slowing outlook.
- January JOLTS report confirmed the strong payroll number and concern surrounding labor market imbalances. The spread of 1.78mm between openings (+21.7%) and hires (+4.2%) set a new all-time record. The quits data at 3.490mm indicates only moderate mobility.
- Preliminary March consumer sentiment bounced to 97.8. Closely watched inflation expectations fell 0.2% for the forward year (2.4%) but the five-year increased 0.2% to 2.5%.
- China’s unemployment rate jumped from 4.9% to 5.3% in January and industrial output fell to its lowest pace (5.3%) since 2002 but exports jumped markedly so far in March.
- German industrial production in January (-0.8% v 0.5%m, -3.4%y) fell short of expectations, failing to follow up the strong bounce in December and hitting its lowest level since February 2017. It has fallen in four of the last five months and in six of the last eight.