The balance of bullish arguments (earnings, economy) and bearish arguments (valuations, interest rates, tariffs) netted a down week for U.S. and most international equity markets while the yield curve flattened a fair amount.  The S&P 500 closed out the week almost exactly between the January record high and February correction low. Market drivers on the week included the appointment of Larry Kudlow as the new Chief White House Economic Advisor and a heavy calendar of economic releases.

Market Anecdotes

  • Larry Kudlow is seen as a strong dollar and hardline China replacement to Gary Cohn.  Given his TV experience, he is seen as a strong pitchman and a good match for POTUS but has markets somewhat on edge regarding U.S. trade protectionism.
  • The short end of the yield curve finished pricing in the FOMC rate hike expected this week, pushing the 3-mo yield up 11 bps to a ten year high of 1.77%.  Yields fell further out on the curve resulting in a significant flattening last week.
  • Pipeline stocks were hit last week on a FERC ruling that MLPs can no longer recover a key income tax allowance.
  • One measure of breadth in the market, percentage of stocks trading above their moving averages, has been skewed by technology stocks.  48% of S&P 500 stocks are above their 50 dma while 82.6% of technology stocks stand above. 65% of S&P 500 stocks are above their 200 dma while 91% of technology stocks stand above.
  • With 99% reported, aggregate 4Q earnings exceeded expectations by 4.4% which took the earnings growth rate from 11% on December 31st to 14.8% today.
  • Italy’s elections in early March resulted in a “hung parliament” with no party attaining a majority.  The euroskeptic parties collectively (League, Five-Star, Brothers of Italy) did much better than mainstream parties.  Due to vastly differing overall agendas, it is difficult to see an anti-Euro coalition taking shape, but League + Five Star is seen as the worst combo of the three.
  • Eurozone real 4Q GDP grew 0.6% q/q and 2.5% for all of 2017, which is the fastest pace of growth in a decade.  Japanese real GDP grew 0.4% q/q and 1.6% for all of 2017, marking eight consecutive quarters of positive GDP growth, its longest growth streak since 1994.
  • The U.S. Energy Information Administration (EIA) crude oil production forecasted that U.S. oil output will surge to new records over the next two years.  The U.S. produced 9.3 bbl/d in 2017. EIA forecasts 10.7 bbl/d in 2018 and 11.3 bbl/d in 2019. If the U.S. hits these numbers, we will become the world’s top oil producer for the first time since the 1970’s.

Economic Release Highlights

  • February CPI came in exactly as expected with headline and core registering 2.2% and 1.8% respectively.  CPI is clearly trending higher, but the overall pace remains moderate. Three-month core CPI is at its highest rate since 2008.  Wholesale inflation (PPI) softened slightly from earlier in the year but core PPI is still at its highest level since 2011.
  • A NY Fed survey of inflation expectations confirms the rising trend.  Expectations are at their highest levels since March 2017 and those expecting deflation or 0%-1% inflation fell to new lows.
  • The tax cuts aren’t necessarily being passed to retailers.  For a third consecutive month retail sales missed expectations but February did grow at a respectable 4% yoy rate.
  • February housing starts (-7%) and building permits (-5.7%) both missed expectations but remain at healthy levels.  Softness seems to be concentrated more in the multi-family sector.
  • Strong mining and manufacturing data lifted February industrial production 1.1%, up from a softer than expected January.
  • Citigroup Economic Surprise Indices suggest economic momentum around the world has slowed recently with the most pronounced relative trend reflecting a slowdown across the Eurozone.
  • Jobless claims remain in one of the most prolonged downtrends in history.  Nine consecutive weeks below 250k (longest since 1973) and 158 consecutive weeks below 300k (three weeks shy of the all-time record).