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  • December 18, 2018

Week in Review

Week Ending: December 21, 2018

Recap & Commentary

Markets ended the week lower, driven by continuing concerns about trade and global growth. Political uncertainty surrounding Brexit, and the potential for a U.S. government shutdown also weighed on markets. Investors were also looking ahead to the Fed’s December 18th and 19th meetings, at which time the Fed is expected to raise rates again by 0.25%.

Unlike other recent weeks, news regarding trade negotiations with China was largely positive with several reports suggesting that China is considering lowering auto tariffs, resuming purchases of U.S. soybeans, and easing its “Made in China 2025” program to allow more foreign competition. However, markets remained skeptical about the veracity of the reports given the difficulty in confirming specific details.

In the U.K., PM May survived a no-confidence vote, but the very fact the vote was held illustrates how tenuous her grasp on power remains. After canceling a Parliamentary vote on her Brexit plan at the start of the week, due to the likelihood of it failing, the next steps in the process remain uncertain. What is certain is that Parliament must approve a plan soon to avoid a “hard” Brexit.

In the U.S., concerns about a government shutdown were elevated after a contentious meeting between the President and Democratic leaders in which the President pledged to shut down the government, if necessary, over funding for border security.  Government funding is currently set to expire at the end of Friday. Should a shutdown occur, nearly a quarter of the government would be affected including the departments of the Interior, Agriculture, State, Treasury, Commerce, EPA, and Homeland Security. Unaffected would be the Pentagon, Veterans Affairs and the Health and Human Services Department.

Economic Bullet Points

Inflation—At a 2.2% annual pace, headline CPI remained unchanged in November, down from 2.9% as recently as July, driven primarily by the pullback in energy costs. Energy fell 2.2% in the month with gasoline down 4.2% reflecting November’s $20 drop in oil. Core inflation, conversely, rose 0.2% in the month as underlying trend inflation continues to firm, however, at a 2.2% Y/Y clip, core inflation is consistent with the Fed’s target. Producer prices edged up in November, rising an as expected 0.1% at the headline level and 0.3% at the core level. Y/Y, the wider trend is mixed, but recent reports point to price pressures.

Retail Sales rose 0.2% in November. Gas stations saw a price-related 2.3% decline, but other categories performed better. Control group sales, a proxy for PCE (Personal Consumption Expenditures: a major GDP input) that excludes several volatile components, grew 0.9%, the best monthly print year-to-date.

Industrial Production rose 0.6%, boosted by robust utilities and mining output. Manufacturing production, however, was flat and is expected to moderate further given slower U.S. and global growth.

Small Business Optimism dropped for the third consecutive month on softer expectations for economic growth and concerns about the recent market selloff.

Of Note

The “Cars for Cheese” Deal—the EU and Japan struck a trade deal, effective Feb. 2019, that covers ~30% of global GDP and 40% of global trade. It abolishes tariffs on +90% of goods between the regions and will save billions in duties per year. The pre-deal trade relationship is worth ~130B euros.

Market Indices Week of 12/14

S&P 500                        -1.3%

Small Caps                    -2.6%

Intl. Developed             -0.9%

Intl. Emerging              -1.0%

Commodities                -2.6%

U.S. Bond Market            0.1%

10-Year Treas. Yield         2.89%

US Dollar                          1.0%

WTI Oil ($/bl)                      $51

Gold ($/oz)                     $1,235

The Week Ahead

  • GDP
  • Leading Indicators
  • Corporate Profits
  • Various Housing Reports
  • Durable Goods Orders
  • Personal Income and Outlays
  • Consumer Sentiment
  • Jobless Claims

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