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Week in Review

Week Ending: Friday, March 22, 2019

Recap & Commentary

Point-to-point, equity markets (as measured by the S&P 500) were little changed for the week. However, that belied a significant drop on Friday stemming from disappointing European economic data and a further inversion of the U.S. Treasury yield curve. The Fed’s decision earlier in the week to forgo any additional rate hikes in 2019, was interpreted by some that the Central Bank is preparing for downside risks to current economic growth forecasts.

On Friday, disappointing German manufacturing data stoked concerns about a broader European slowdown. In response, the yield on Germany’s 10-year bond fell into negative territory for the first time since 2016. That in turn raised demand for U.S. Treasuries, which drove longer-term rates down, culminating in an inversion of the yield curve between the 3-month Treasury Bill and the 10-year Bond. Such an inversion, widely considered a harbinger of recession, last occurred in 2007. While an inversion does not immediately result in a recession it suggests that an economic cycle is nearing an end. Historically, recessions have followed an inversion within one to two years. Moving forward, employment data will be scrutinized even more closely for signs of slowing.

The EU agreed to provide a Brexit extension until May 22 contingent upon Britain's Parliament approving PM Theresa May’s Withdrawal Agreement next week. Failure to do so, would shorten the extension to April 12. If Parliament (once again) rejects May’s plan, while failing to provide an alternative plan, then the UK could “crash out” of the EU as early as April 12.

Economic Bullet Points

The Leading Economic Index (LEI) rose 0.2% in February, its first gain in five months. The 6-month rate of change eased 0.5%, while the year-on-year change slowed to 3.0%. Overall, the data suggests that economic activity is likely to slow over the next six months.

Housing Market Index data failed to rise as expected in March, but at a value of 62, it held steady at February’s level.

Existing Home Sales—After falling in three of the past four months, sales of existing homes rebounded in February. Overall, sales jumped 11.8% to a 5.5 million unit pace. Sales benefitted from better weather early this year and lower mortgage rates.

Factory Orders increased 0.1% in January, matching the consensus. On a year-over-year basis, factory orders eased to 3.6%, the slowest pace since January 2017, with both durable and non-durable orders off recent peaks. The deceleration reflects the trend of slower factory activity so far this year.

Jobless Claims fell -9K to 221K, below the consensus of 225K. The 4-week average rose 1K to 225K claims. While still very low by historical standards, jobless claims bottomed last September, suggesting that the peak of this labor market cycle has past.

Of Note

U.S. Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer are scheduled to fly to China next week to continue high level talks aimed at resolving the ongoing trade dispute between the U.S. and China.

Market Indices Week of 3/22

S&P 500                           -0.5%

Small Caps                      -2.7%

Intl. Developed                 0.5%

Intl. Emerging                   1.2%

Commodities                    0.2%

U.S. Bond Market            0.44%

10-Year Treas. Yield       2.44%

US Dollar                         0.0%

WTI Oil ($/bl)                   $59

Gold ($/oz)                      $1,312

The Week Ahead

  • GDP
  • Corporate Profits
  • International Trade
  • Housing Data (Multiple)
  • Personal Income/Outlays
  • Consumer Confidence
  • Consumer Sentiment
  • Jobless Claims

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