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  • December 10, 2018

Week in Review

Week Ending: December 7, 2018

Recap & Commentary

A week after recording its best performance in seven years the S&P 500 recorded its worst week since March as trade concerns, and a further flattening of the yield curve continued to roil financial markets.

The week started on a strong note with markets staging a relief rally following the G-20 Summit, and news that the U.S. and China had agreed to a 90-day moratorium on any new tariffs. However, optimism quickly faded as it became apparent that the two sides had agreed on little else. An announcement that U.S. trade representative Robert Lighthizer, an outspoken critic of China, had been tasked with leading trade negotiations and the arrest of Chinese tech giant Huawei’s CFO cast further doubt on the outcome of successful negotiations.

Doubts about trade led to concerns about the outlook for economic growth, which resulted in investors dumping stocks for the relative safety of bonds. As bonds rallied, yields fell, pushing the “2-10” spread- the difference between the 2-Year Treasury yield and the 10-Year Treasury yield- as low as 0.10%, its lowest level since 2007. The specter of an inverted yield curve, in which the 2-10 spread turns negative, further spooked investors given that an inversion has preceded every recession since at least 1980. Market volatility will likely remain elevated until concerns about trade and the yield curve are resolved.

OPEC and Russia agreed to cut oil production by 1.2 million barrels/day for six months, beginning in January. Separately, Qatar announced its departure from OPEC to focus on natural gas production. As the 11th largest producer in the group, Qatar’s exit will only impact OPEC oil production by 2%. However, Qatar is already the world’s largest exporter of liquid natural gas (LNG), which is increasingly in demand as countries look to satisfy growing energy needs with cleaner-burning fuels.

Economic Bullet Points

Employment—As expected, the unemployment rate remained unchanged at 3.7% in November. Hiring, however, slowed, as 155k jobs were added versus the 170k three-month average and the 200k expectation. Wage inflation continued to firm as average hourly earnings rose 3.1% from a year ago, versus 2.5% this time last year. The data is expected to keep the Fed on track to raise rates in December, although, if employment data continues to cool by a meaningful clip in coming months, the Fed could move to increase rates more slowly than expected in 2019.

Manufacturing—The ISM and PMI Manufacturing indexes posted solid 59.3 and 55.3 points, respectively, in November, amid stronger growth in new orders, backlogs, and employment. Price increases were muted despite tariffs as oil tumbled, but the supply chain remains tight.

Services data remained strong in October, rising 0.4pts to 60.7 per the ISM. Comments from survey respondents, however, signaled that trade issues and finding labor were key challenges.

Consumer Credit rose a higher-than-expected $25.4B in October with September revised slightly higher to $11.6B. Driving the increase was an outsized $9.2B rise in revolving credit, its largest monthly increase since November, following a $0.3B decline in September. Non-revolving credit also rose, up to $16.2B versus September’s $11.9B print. The consumer is spending and borrowing which, when coupled with healthy credit standards, is a plus for the economy.

Of Note

Seeking to avoid a government shutdown, Congress passed, and President Trump signed, a two-week spending measure to fund the government until December 21st.

Market Indices Week of 12/7

S&P 500                      -4.6%

Small Caps                   -5.6%

Intl. Developed           -2.3%

Intl. Emerging             -1.3%

Commodities               1.2%

U.S. Bond Market        0.9%

10-Year Treas. Yield      2.85%

US Dollar                      -0.8%

WTI Oil ($/bl)                  $53

Gold ($/oz)                  $1,243

The Week Ahead

  • Inflation (PPI & CPI)
  • Retail Sales
  • Industrial Production
  • Small Business Optimism
  • Jobless Claims

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