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Week in Review

Week Ending: Friday, July 20, 2018

Recap & Commentary

Markets posted mixed results during a week that was dominated by political headlines focused on President Trump’s meeting with Russian president Vladimir Putin.  Fundamentals, which arguably matter more than the news du jour, seemed to receive far less attention.

Through Friday, 17% of S&P 500 companies had reported second-quarter earnings with 87% and 77% beating their consensus earnings and sales estimates, respectively.  Per industry group FactSet, 2Q earnings growth is currently tracking at ~21%.

On Tuesday, Fed Chair Jay Powell delivered the Fed’s semi-annual Congressional testimony.  Reading from prepared remarks, Powell expressed optimism with respect to current economic growth but also acknowledged that, “it is difficult to predict the ultimate outcome of current discussions over trade policy…”

On Thursday, President Trump bucked recent convention by publicly discussing the Fed and monetary policy. In an interview, Trump said that he was “not thrilled” about the Fed rate increases, but that he is, “letting them do what they feel is best.”   The essence of his criticism was that, as the economy continues to improve, the Fed continues to raise rates which results in a stronger dollar and takes away “our big competitive advantage.”

The yield curve remained in focus as the “2-10” spread (the spread between the 10-Year and 2-Year Treasury yield) narrowed to just 0.25%, its lowest level since July 2007. Economists continue to debate whether or not the flattening portends weaker economic growth or is being distorted by current global monetary policy. The latter interpretation posits that the short end of the curve is being boosted by continued Fed rate increases, while the long end of the curve is being held in check by overseas investors attracted to relatively high U.S. yields. By some estimates, there is currently over $9T worth of negative-yielding government securities globally.

Economic Bullet Points

  • Industrial production and regional manufacturing data was largely in line with, or better than, expectations. At the regional level, data out of New York and Philadelphia was led by positive trends including strong new orders.  However, in what serves as a cautionary sign with respect to the impact of tariffs, the Philadelphia survey data saw prices paid reach the highest level on record.  At the national level, manufacturing data rebounded sharply after falling by more than one percent in May due largely to supply disruptions caused by a fire at a Michigan auto parts supplier.
  • Housing activity stalled in June as both starts and permits fell on a monthly and annual basis. Housing data is notoriously volatile and best measured over a period of time as opposed to by a single data point.  However, on the surface, June’s data is disappointing with respect to GDP as well as a housing market faced with a chronic supply shortage.
  • Employment conditions remain tight as evidenced by weekly jobless claims which fell to 207k, the lowest level in nearly 50 years (Dec. 1969).

Of Note

  • The rate on the three-month T-Bill reached 2% for the first time since 2008.

Market Indices Week of 7/20

S&P 500                         0.0%

Russell 2000                  0.6%

MSCI EAFE                    0.6%

MSCI EM                       -0.5%

Commodities               -0.1%

Barclay’s Agg.              -0.3%

US Dollar Index            -0.3%

10-Yr Yield                     2.89%

WTI Oil ($/bl)                    $70

Gold ($/oz)                     $1,229

The Week Ahead

  • Existing Home Sales
  • New Home Sales
  • Durable Goods Orders
  • GDP
  • Consumer Sentiment

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