Week in Review
Week Ending: Friday, September 20th, 2019
Recap & Commentary
Equity markets fell slightly during a week that seemingly lacked direction or conviction. U.S. markets ended the week on a down note following news that a Chinese delegation cancelled plans to visit several U.S. farms. At another time, such a development would likely have gone completely unnoticed. However, in the current environment of heightened trade tensions, investors viewed the news as potentially ominous, ahead upcoming trade talks in October. One positive development was a decision by the U.S. to delay an increase in tariffs on $250B of Chinese goods set to take effect on October 1, until October 15.
On Wednesday, as expected, the Fed cuts its key Fed Funds rate by -0.25%, to a range of 1.75-2.0%. Speaking afterwards, Fed Chair Jay Powell stated that the bank took the step to “help keep the U.S. economy strong in the face of some notable developments and to provide insurance against ongoing risk.” In addressing the idea that there are limits to the ability of monetary policy to stimulate economic growth, Powell said that “it's really fiscal policy that is more powerful and that…can do those things that will increase the longer-run growth rate of the United States…It's not a function of monetary policy.” Current market expectations are for one additional rate cut before the end of the year.
Oil ended the week 6% higher following attacks on a Saudi Arabian oil facilities which initially knocked offline over 5 million barrels/day. Following a 15% surge on Monday, oil prices moderated over the course of the week as Saudi Arabia was able to restore ~50% of the lost capacity.
Economic Bullet Points
The Conference Board’s Leading Economic Index (LEI) was unchanged in August. Half of its ten components increased, led by building permits, and half of them declined, led by ISM new orders. But on a y/y basis, the LEI has slowed to just 1.1%, the least since November 2016, implying continued moderation of economic growth for the balance of this year and in early 2020.
Housing — Low mortgage rates continue to help the housing sector as evidenced by better-than-expected August housing starts and existing home sales data. Additionally, Housing Market Composite Index data confirmed the trend after rising above Econoday's consensus range. Specifically, the current sales component drove September's increase, which offers a positive indication for coming new home sales while the traffic component remained unchanged.
Industrial production rebounded 0.6% in August, the most in a year, and above the consensus of 0.2%. Manufacturing, which accounts for about 3/4 of industrial production, climbed 0.5%, with both durable and nondurable goods output up by the same amount. The most significant gains were in machinery, primary metals, fabricated metal products, chemicals, and plastics and rubber. Vehicles output, however, declined 1.0%, down for the first time in four months, and could suffer further as a result of the GM strike this month.
Over the course of the week, the New York Fed was forced to inject $275B into the repurchase-agreement (repo) market after rates spiked to 10%. The vital but obscure part of the market allows large companies such as banks, that own lots of securities but are short on cash, to cheaply borrow money (typically overnight) from other large investors holding excess cash.
|U.S. Bond Market||0.8%|
|10-Year Treas. Yield||1.72%|
|WTI Oil ($/bl)||$58|
The Week Ahead
- Corporate Profits
- Durable Goods Orders
- New Home Sales
- Intn’l Trade in Goods
- Jobless Claims