U.S. equity markets softened a bit in the final, holiday shortened week of the year. Year‐end profit taking across large cap technology stocks acted as a headwind to major indices. Commodity markets rallied to close out the year, likely aided by a weak U.S. dollar and a relatively optimistic economic viewpoint looking ahead. Oil closed above $60 for the first time since middle 2015 and the slope of the yield curve fell and nearly matched its low for the year.

Market Anecdotes

  • The elephant in the room is Fed policy (rate hikes and taper) not fiscal policy (tax cuts and infrastructure). The Financial Post’s David Rosenberg reports that Fed tightening in 2018 will have more than six times the impact on the economy than the fiscal loosening, and three times the impact on corporate profits.
  • Consensus Inc. conducts a survey of newsletter writers, and published a 12/22 report showing 78% of respondents were bullish, a level not seen since January 2004 when 81% were bullish.
  • Italeave? Italy’s President, Sergio Mattarella, dissolved parliament on Thursday and called for elections to be held in early March. European leaders are concerned with the populist movement in Italy given massive public‐sector debt, poor competitiveness, and weak banks.
  • The 10‐year U.S. Treasury yield fell 0.08% for the week, finishing the year at a modest 2.4%, nearly right where it started the year (2.45%). The 30‐year U.S. Treasury yield fell 0.09% to 2.74%, finishing the year notably lower than the 3.08% rate at the end of 2016.
  • FactSet reports the S&P 500 P/E multiple is roughly 23x trailing 12‐month earnings, well above the 10year average level of 17x and a premium to other non‐U.S. equity markets.
  • The CME Fed Funds futures contract finished the year assigning a 56.4% likelihood of another 0.25% rate hike in March 2018.
  • The latest Atlanta Fed GDP Nowcast for Q4 GDP is 2.8%, a downward revision from last week due to lower projected consumer spending.
  • The latest Cleveland Fed Inflation Nowcast for y/y December inflation is for core PCE to hold at 1.46% and core CPI at 1.62%.
  • Inflation expectations rebounded sharply toward year end. The 10‐year TIPS breakeven finished the week at 197.5 basis points, up sharply from 167 basis points in June of 2017.
  • Copper soared to a four‐year high and aluminum surged to its highest level since 2012, both aided by a brighter economic outlook and a weaker U.S. dollar ‐ which sank to a four week low to close the year.
  • The Keystone XL pipeline received its last state approval from Nebraska.

Economic Release Highlights

  • After posting back‐to‐back 17‐year highs, the consumer confidence index cooled slightly in the December report, to 122.1 vs a revised 128.6 in November and 126.2 in October.
  • The EIA reported crude oil inventories fell sharply for a sixth week in a row, taking the year over year decline to 11.1%.
  • The Baker Hughes North American rig count fell by 76 rigs in the last week of the year to 1,065 but stands 271 higher than the same week last year.
  • China revised their November industrial profits downward from 25.1% to 14.9% and reported that wages and hiring ebbed in December, indicating a potential slowdown heading into 2018.