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  • December 3, 2018

Week in Review

Week Ending: Friday, November 30, 2018

Recap & Commentary

Markets recorded solid gains buoyed by comments from Fed Chair Jay Powell and optimism ahead of the G-20 summit. After celebrating Thanksgiving with its worst week since March, the S&P 500 rebounded with its best week since December 2011.

Markets rallied significantly on Wednesday following comments by Fed Chair Jay Powell that interest rates "remain just below the broad range of estimates of the level that would be neutral for the economy.” After his October comment about rates being “a long way” from neutral, Powell’s comments on Wednesday were seen as “dovish,” and perhaps foretelling that the Fed might not pursue its current forecast of three rate hikes in 2019. However, another interpretation of Powell’s comments was that he was simply stating the obvious. With the Fed Funds rate currently at 2.0-2.25%, it is just 0.25% from the lower bound of the Fed’s neutral rate estimate of 2.5-3.5%. With another 0.25% rate increase in December all but guaranteed, the Fed Funds rate would technically be at the neutral range by year-end.

Minutes from the Fed’s November FOMC meeting reinforced the idea that the Fed will raise rates again in December but thereafter may become less automatic with respect to further rate hikes. The minutes also revealed a discussion about possibly revising the language in post-meeting statements that refer to “further gradual increase” to instead focus on the Committee’s “flexible approach” to incoming data.

The highly anticipated meeting between President Trump and Chinese President Xi resulted in a truce in the current trade. While few concrete details emerged, the two countries did announce a 90-day moratorium on any new tariffs to allow time to negotiate on a number of issues.

Economic Bullet Points

GDP—The second estimate of Q3 GDP left headline growth at an unrevised 3.5% annualized pace. Overwhelmingly, reported GDP growth in the third quarter was underpinned by the strength of Q3 corporate profits, which rose 10.3% on a before-tax basis versus year ago levels—the fastest pace since 2012. Notably, personal consumption (consumer spending) was revised lower to a 3.6% pace from 4.0% initially. However, a modest upward revision to business investment spending offset the decline. The volatile trade environment also caused a higher than initially reported build in company inventories, although decreased net exports balanced the drop. Inflation wasn't a risk in the third quarter with the GDP price index remaining unchanged from the first estimate at a 1.7% rate. Y/Y, this reading has trended slightly higher, but it did dip a meager 0.1% to a trailing 2.3% pace.

Corporate Profits—Pre-tax corporate profits rose 10.3% Y/Y to $2.3T, and after-tax profits at $2.1T increased 19.4%. Excluding inventory valuation and capital consumption adjustments, after-tax corporate profits rose 5.9% Y/Y in Q3 to $1.9T.

Personal Income and Outlays—Personal income increased 0.5% and spending increased 0.6% in October. Both exceeded expectations, although the prior month’s increase in consumer spending was revised 0.2% lower, to 0.2%.

International Trade in Goods—the goods portion of the US trade deficit widened -$77.2B in October, vs. the -$77.2B estimate and the -$74.6B Q3 monthly average. Tariffs effects have been elusive, despite headlines, but are now showing in the data.

Of Note

According to some estimates, U.S. companies are on pace to return a record $1.2T to shareholders in 2018 in the form of stock buybacks and dividends.

Market Indices Week of 11/30

S&P 500                     4.9%

Russell 2000              3.0%

MSCI EAFE               1.0%

MSCI EM                    2.6%

Commodities            1.4%

Barclay’s Agg.            0.1%

US Dollar Index         0.4%

10-Yr Yield                   3.01%

Oil ($/bl)                          $51

Gold ($/oz)                 $1,218

The Week Ahead

  • Employment Situation
  • US Manufacturing Data
  • US Services Data
  • Construction Spending
  • Productivity and Costs
  • Consumer Credit
  • Consumer Sentiment

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