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Week in Review

Week Ending: Friday, October 12, 2018

Recap & Commentary

Stock markets ended the week significantly lower following a two-day selloff mid-week that saw the S&P 500 drop over 5%. A strong rebound on Friday helped recover some of the losses. Emerging markets, which have lagged for much of the year, fared better over the course of the week.

For much of the third quarter, U.S. markets seemed rather impervious to growing concerns about higher interest rates and trade tensions with China. Following a sharp rise in rates to start the month and a series of events which elevated tension with China, investors suddenly awakened to the potential threat(s) posed by these factors. The actual catalyst to the selling appeared to be comments from several companies indicating that trade policy is beginning to impact their financial results. The selling suggested that some investors were preemptively bracing themselves for disappointing earnings and/or outlooks from corporations.

Third-quarter earnings season began in earnest led by a number of big banks. Through Friday, just 6% of S&P 500 companies had reported third-quarter earnings.  According to industry group FactSet, S&P 500 earnings growth is currently forecasted at 19.1%.

Conservative allies of Chancellor Angela Merkel suffered a humiliating loss in a parliamentary election in the southern German state of Bavaria on Sunday. The results intensified questions regarding the stability of Chancellor Merkel’s government, and whether she can serve out the entirety of her fourth term.

Economic Bullet Points

Inflation—September data came in, more or less, as expected last week. Producer prices (PPI) at the headline level rose 0.2%, in line with consensus, but moderated to 2.6% from 2.8% Y/Y. The gain was driven largely by an increase in transportation services costs, up 0.3% M/M, as transportation and warehousing prices increased a significant 1.8%. Lack of capacity in the shipping sector has been a serious constraint in 2018. Core PPI (less food, energy, and trade services) matched last month’s 2.9% print. Consumer prices came in marginally softer-than-expected, growing just 0.1% for both the headline and core measures. A 0.5% drop in energy prices subdued the headline number, while core CPI was held down by a 3.0% decrease in used auto prices. Y/Y, core inflation remained at 2.2% while headline CPI rose 0.1% to 2.3%, helping assuage concerns that inflation might be increasing too rapidly.

Sentiment IndicatorsSmall Business Optimism slipped 0.9 points in September to 107.9 but remains near its all-time high reached last month. Although optimism is high, survey participants continue to be frustrated with their inability to find the workers they need, and they are paying more to hold onto existing workers. Overall, the operating environment for small businesses remains remarkably positive with a significant number of operators citing that the next three months will be a good time to expand. September Consumer Sentiment data was also solid but was pulled down slightly due to less favorable views concerning personal finances. Additionally, last week’s stock declines had virtually no impact on reported sentiment results.

Of Note

The U.S. budget deficit ended the fiscal year at $779 billion, up from $666 billion a year ago. Outlays rose by $127 billion, or 3.2%, while revenues rose by only $14 billion, or 0.4%.

Market Indices Week of 10/12

S&P 500                           -4.1%

Russell 2000                   -5.2%

MSCI EAFE                     -4.0%

MSCI EM                          -2.1%

Commodities                   1.3%

Barclay’s Agg.                  0.4%

US Dollar Index             -0.7%

10-Yr Yield                        3.14%

WTI Oil ($/bl)                      $71

Gold ($/oz)                      $1,220


The Week Ahead

  • Retail Sales
  • Industrial Production
  • Housing Starts
  • Existing Home Sales
  • Leading Indicators

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