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Week in Review

Week Ending: Friday, October 5, 2018

Recap & Commentary

Markets sold off on a combination of factors including interest rates, oil, and happenings in Italy and China. Small cap and emerging market stocks, which tend to be more susceptible to growth expectations, recorded their worst weeks in over six months.

On the heel of the Fed’s recent rate increase, coupled with strong economic data and comments by Fed Chair Jay Powell that the central bank is “a long way” from getting rates to neutral, interest rates surged. Yields on 10-Year and 30-Year Treasuries ended the week at 3.23% and 3.41%, respectively, their highest levels since 2011. One ancillary benefit of the higher rates was a steepening of the yield curve.

Relief from a reworked NAFTA agreement at the beginning of the week was outweighed over growing concerns about China. Bloomberg published a detailed report alleging China planted tiny spy chips on computer motherboards in servers used by nearly 30 companies, including Apple and Amazon. There was a near-collision between a U.S. Navy destroyer and a Chinese warship making unsafe maneuvers. Vice President Mike Pence accused China of interfering in U.S. politics. All three episodes left markets with the impression that current trade tensions between the two countries are unlikely to diminish in the near-term.

Italy’s populist government released its proposed budget plans that would push the country’s deficit to 2.4% of GDP. While below the EU-mandated 3% limit, the plans also violated another rule by boosting the structural deficit. The concern for markets is that the EU could reject the draft budget, which it has never done to any country, leading to market turmoil. Italy has until mid-October to formally submit its budget.

Oil continued to trade higher following OPEC’s recent decision to maintain current production levels just as new U.S. sanctions on Iran reduced global supply.

Economic Bullet Points

US Manufacturing proxies posted solid overall strength in September with both ISM and PMI Manufacturing Index data coming in around consensus expectations. However, there were indications of a potential slowing in future reports as both new orders and order backlogs fell and are now below their respective six-month averages. Factory orders were also strong at the headline level, due primarily to a sharp upswing in commercial aircraft orders (up 69%) and defense aircraft orders (up 17%). If excluding these orders, along with the increase in ships and boats and a 1% rise in motor vehicles, factory orders in August managed a more modest gain. Elevated tariff concerns were also cited in the reports.

US Services data was mixed, but overall, the report came in ahead of expectations, driven by a record high in employment and a 14-year high in business activity.

International Trade—The trade deficit widened further in August from the prior revised $50B level to $53.2B. The monthly average in the second quarter was $44.6B.

Employment—Nonfarm employment data for September came in below expectations at 134K vs. 180K. Hurricane Florence had an uncertain, but likely negative, impact on the numbers. August was revised up 69K to 270K. Unemployment fell 0.1% to 3.7%, its lowest level since 1969.  Wages rose 2.8% Y/Y vs. 2.9% in August.

Of Note

According to the Department of Energy, the 3.3M barrels/day of oil produced from the Permian Basin, located primarily in western Texas, exceeds that of all but two OPEC countries – Saudi Arabia and Iraq.  OPEC consist of a total of 15 countries.

Market Indices Week of 10/5

S&P 500                           -1.0%

Russell 2000                   -3.8%

MSCI EAFE                      -2.4%

MSCI EM                          -4.5%

Commodities                   2.0%

Barclay’s Agg.                 -0.9%

US Dollar Index                0.5%

10-Yr Yield                        3.23%

WTI Oil ($/bl)                       $74

Gold ($/oz)                       $1,204

The Week Ahead

  • Small Business Optimism
  • PPI
  • CPI
  • Consumer Sentiment

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