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Week in Review

Week Ending: Friday, March 2, 2018

Recap & Commentary

Markets ended the week lower after being buffeted by fears of higher interest rates and the prospect of a trade war.

Speaking before Congress for the first time as head of the U.S. Federal Reserve, Jay Powell delivered testimony that was decidedly upbeat. That assessment, coupled with comments that continued improvements in economic data could lead the Fed to raise its interest rate outlook at its March meeting and that the Fed must try to avoid an “overheated economy”, helped push equity markets lower and interest rates higher.

On Thursday, President Trump announced that he would impose 25% tariffs on steel imports and 10% tariffs on aluminum imports, ostensibly for national security reasons and to protect U.S. producers. Responding to fears that his actions could result in a destructive trade war, Trump stated that “trade wars are good” and easy to win.  Many economists are less sanguine. According to Barron’s, payrolls of U.S. steel and aluminum producers totaled 203k in January, compared with an estimated 6.5M in industries that use steel, such as automobile production, aerospace, and construction.

Through Friday, 97% of S&P 500 companies had reported fourth quarter earnings, effectively bringing earnings season to an end. For the quarter, 74% of companies beat their earnings estimate, while 77% beat their topline estimate. The latter marks the highest such percentage since industry group, FactSet, began tracking the metric in 3Q08.  For the quarter, S&P earnings grew 14.8% Y/Y, the highest growth since 3Q11.

Economic Bullet Points

The New Home Sales market surged into the end of 2017, so understandably pulled back a bit in the first month of 2018. January saw a welcomed move of supply into the market, though lack of supply remains an issue constricting the growth of sales. Home Prices continue to trend higher, but given the quick rise in home prices of late, some slight moderation was welcomed and will help to lower fears of overheating.

Indicators on the factory sector were mixed for the month. Durable Goods Orders reported more signs of moderation than acceleration. New orders fell 3.7%, and, unfortunately, core capital goods were a part of the weakness. Despite strength in the regional surveys, the factory sector appears to be mirroring the housing sector, moderating a bit following last year’s rush at year-end. The gap did not converge this month. However, the ISM Manufacturing Index topped even high-end expectations, reaching its highest level in 14 years. Construction Spending was flat in January, nonresidential spending being the weak link.

Consumer Confidence remains a standout amongst economic data. February’s reading easily topped high-end expectations. Similarly, both the current conditions and expectations components within the Consumer Sentiment report were robust. This is somewhat a contrast to more limited strength in actual consumer spending. The income side of Personal Income & Outlays reflected tax changes with personal taxes down 3.3% in the month, underpinning a solid 0.4% M/M rise in personal income. Spending data was softer, up just 0.2%.

GDP was revised just 0.1% lower to a 2.5% annualized rate. Consumer spending remained quite strong. Where spending on durables was lacking, service spending more than made up for it. Inventory growth rose quickly, as businesses hurried to restock shelves amid strong consumer demand.

Of Note

  • February marked the end of the S&P 500’s record 15 consecutive months in which the index recorded a positive total return.
Market Indices Week of 3/2

S&P 500                       -2.0%

Russell 2000                -1.0%

MSCI EAFE                  -2.9%

MSCI EM                      -2.8%

Commodities             -0.6%

Barclay’s Agg.              0.0%

US Dollar Index            0.1%

10-Yr Yield                   2.87%

WTI Oil ($/bl)                   $61

Gold ($/oz)                   $1,318

The Week Ahead

  • Factory Orders
  • ISM Non-Mfg Index
  • International Trade
  • Employment Situation
  • Jobless Claims
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