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Week in Review

Week Ending: Friday, July 13, 2018

Recap & Commentary

Markets ended the week higher as investors seemed to once again shrug off concerns about a global trade war. The start to earnings season probably arrived at the perfect time as it focused investors on fundamentals as opposed to the difficult task of trying to determine the exact ramifications of recently enacted tariffs.

President Trump forged ahead with his trade war by announcing plans to set a 10% tariff on an additional $200B of Chinese imports. The move was in response to China enacting reciprocal tariffs on $34B of U.S. import tariffs last week. Before going into effect, the new tariffs must undergo a public comment period that will end August 30.

Through Friday, twenty-five S&P 500 companies had reported earnings with 89% and 85%, beating their earnings and revenue estimates, respectively. According to FactSet, projected earnings growth for the full quarter currently stands at 19.9% Y/Y.

Brexit returned to the headlines on the heels of several significant developments. On Monday, several ministers within Prime Minister Theresa May’s government resigned, including the Brexit Secretary who was responsible for negotiating the terms of Brexit with the EU. On Thursday, May unveiled her proposal for Brexit, setting out plans for an “association agreement”. The agreement confirmed May’s intention to seek a “soft” Brexit which would maintain close economic ties with the EU as opposed to a “hard” Brexit that would effectively result in severing all current ties. At the end of the week, President Trump weighed in by criticizing the plan and May’s overall handling of the Brexit process. The events of the week once again left May in a precarious position and increased the likelihood of a leadership challenge, perhaps sooner rather than later.

Economic Bullet Points

Inflation climbed higher in June according to both headline and core PPI and CPI figures. Core PPI and CPI (our preferred measures which exclude volatile food and energy prices) rose 2.8% and 2.3% Y/Y, respectively. For businesses, underlying trend inflation has firmed as input costs have risen due to constrained capacity and tariff-related uncertainties. Consumer prices also rose due to solid consumer spending and minimal employment slack in the economy.

Consumer credit card debt rose sharply in May to $24.6B, handily beating the high-end of estimates by $2B. Revolving credit balances increased $9.8B, marking the largest increase since November 2017, and nonrevolving credit (ex. auto and student loans) rose $14.8B. While this rise in credit financing comes as rates are rising, pushing up the cost of consumer debt, rising incomes and robust economic growth have helped to keep the aggregate debt service ratio well below its pre-recession peak.

Sentiment indicators for small businesses and the consumer dipped slightly in June, but remain near all-time highs. Businesses and consumers are generally upbeat but cited the potential impact of the ongoing trade dispute as a growing concern.

Jobless Claims remain near historic lows and are consistent with a low unemployment rate and strong job growth. Claims decreased by an unexpected 18K to 214K, versus the 225K expectation.

Of Note

According to the Institute of International Finance, global debt rose $8T in 1Q18 bringing the total to a new record of more than $247T.  On a debt-to-GDP basis, global debt now stands at 318%.  Total debt has risen by $30T since 4Q16.

Market Indices Week of 7/13

S&P 500                           1.5%

Russell 2000                 -0.4%

MSCI EAFE                     0.2%

MSCI EM                          1.5%

Commodities               -2.7%

Barclay’s Agg.                0.2%

US Dollar Index             0.8%

10-Yr Yield                     2.83%

WTI Oil ($/bl)                    $71

Gold ($/oz)                   $1,242

The Week Ahead

  • Retail Sales
  • Empire State Mfg. Survey
  • Industrial Production
  • Housing Market Index
  • Housing Starts
  • Jobless Claims
  • Philly Fed Business Outlook Survey
  • Leading Indicators

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