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Week in Review

Week Ending: January 12, 2018

Recap & Commentary

A strong start to earnings season and upbeat retail sales data propelled stocks to new record highs and the best start to a year, through the first nine trading days, since 2003.

Through Friday, just 5% of companies within the S&P 500 had reported fourth-quarter earnings, including several of the largest banks. JP Morgan made headlines for beating expectations as well as positive comments by CEO Jamie Dimon about the recently enacted tax bill. Mr. Dimon praised the bill saying that it was a “significant positive outcome for the country” and that it would “ultimately benefit all Americans”. According to FactSet, fourth-quarter earnings for the S&P 500 are expected to grow 10.2% from 4Q16. If recent trends are any indication, earnings may well come in closer to 12%.

Stronger-than-expected core inflation readings pushed the 2-Year Treasury yield above 2.0% for the first time since 2008, lending support to the Fed’s case for additional rate hikes in 2018. If inflation accelerates faster-than-expected in 2018, the Fed may be forced to raise interest rates more quickly than the market currently anticipates.

Crude closed above $64/bl for the first time in over three years, as U.S. inventories declined for an 8th straight week. Since closing just above $26/bl in early February 2016, oil has gained over 145%.

Germany moved one step closer to forming a new government following a week of marathon negotiations. The new coalition would help remove the political uncertainty that has hung over the country since September and would be welcome news for the markets as well.

Economic Bullet Points

Inflation readings for December were mixed making it harder to discern the degree to which inflation may or may not be accelerating. At the producer level, headline inflation slowed markedly in December, falling by -0.1%, the first monthly decline since August 2016. Core inflation also fell by –0.1%. Y/Y. At the consumer level, readings were more positive with headline inflation rising 0.1% from the prior month, and 2.1% Y/Y. Core inflation readings, which arguably have a larger impact on the Fed’s decision making with respect to monetary policy, rose 0.3% from the prior month, and 1.8% Y/Y, beating expectations by 0.1%. Rising housing and medical care costs were the primary drivers.

Readings on the business environment were positive. Though small business sentiment pulled back slightly in December from its recent 13-year high, it remained very strong. Separately, business inventories rose faster than expected but well below the pace of business sales. That bodes well for future economic activity as businesses will need to replenish those inventories which should result in greater production increases and hiring.

Consumers remained upbeat in December as evidenced by their spending. Core retail sales rose 0.4% in the month while November’s figures were revised upwards by 0.4% to 1.2%. Nonstore retailers, i.e. online stores, continued to drive growth as brick-and-mortar sales were only modestly positive and department store sales actually fell.

Of Note

Rating agency Standard & Poor’s lowered Brazil’s debt rating further into junk territory, citing uncertainties about the country’s political situation and efforts to reform the country’s costly pension system.

Market Indices Week of 01/12

S&P 500                    1.6%

Russell 2000             2.1%

MSCI EAFE              1.2%

MSCI EM                    0.6%

Commodities            1.0%

Barclay’s Agg.           -0.2%

US Dollar Index        -01.1%

10-Yr Yield                   2.55%

Oil ($/bl)                          $64

Gold ($/oz)                 $1,327

The Week Ahead

  • Empire State Mfg Survey
  • Philly Fed Business Outlook
  • Industrial Production
  • Housing Starts
  • Consumer Sentiment
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