U.S. equity markets meandered around much like they have since the S&P 500 hit an all-time high in mid-August. Last week the market focus was on early indications of 3Q earnings season, the complexion of Washington DC post 11/9, and the interrelationship between the economic backdrop and central bank policy. Overall, U.S. equities finished up 0.4% while most international markets gained over 1% with help from a rising U.S. dollar, which appreciated 0.7% against a basket of currencies. Non U.S. equity markets of Europe, Japan, and China gained 1.3%, 1.9%, and 0.9% respectively. The U.S. dollar trended higher on increasing expectations of a Fed hike at the upcoming December 14th FOMC meeting. Futures markets pricing of a rate hike have seen probabilities increase to 70%, a high water market thus far. Of note is that all four major central banks (Fed, ECB, BoJ, BoE) have indicated they are ready to ‘look through’ faster price gains (inflation) with the hope that it takes hold. U.K. inflation is trending at its fastest pace in 2 years.
Flat industrial production, percolating inflation data, and a firm labor market were the focal points of the economic backdrop last week. September CPI was reported up 1.5% with core CPI climbing a more robust 2.2%, the highest reading on the core measure since October of 2014. The headline CPI figure, however, is in the midst of the longest streak in 53 years (1963) of less than or equal to 1.5%. The job and wage backdrop seem supportive of a December rate hike. Weekly jobless claims of 260,000 marked the 84th consecutive week of less than 300,000 claims, the longest such streak since 1970. The 2.05 million continuing claims is the lowest level since 2000. Labor force participation has increased 1% over the past 12 months which is the fastest annual increase recorded since 1989 and we are registering the fewest number of Americans filing for unemployment benefits in over 42 years. That said, the number of underemployed people is inflating job market success with 7.8 million people working 2 or 3 jobs to make ends meet. Also impacting figures is that many states have made material cuts to the duration of unemployment benefits that they offer.
If the S&P 500 records its sixth consecutive quarterly earnings decline, it will be the first time since FactSet began tracking the data in 2008 that will have happened. Coming into earnings season, forecasts called for earnings of -2.1%. With 25% of the results in thus far, companies have been beating expectations, trending at a -0.3% loss.
Material events overseas last week included the PBOC moving to weaken the yuan, a meeting of the ECB, and more political posturing on Brexit negotiations in the U.K. China, the largest holder of U.S. government bonds, reported U.S. Treasuries holdings falling to a 4 year low of $1.19 trillion, largely driven by PBOC attempts to prop up the yuan from falling further. Capital outflows from China remain a material concern of policy makers in mainland China. The ECB met Thursday to discuss the bond purchase program and interest rates. No material changes were announced but timing of a taper and scarcity issues of bonds to purchase loom. A Eurozone bank lending survey indicated tightening lending standards and falling demand, much to the disappointment of the ECB. Saudi Arabia acknowledged budgetary issues as a result of lower oil prices, issuing their first sovereign debt offering of $17.5b, the largest emerging market bond issue on record.
