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Week in Review

Week Ending: Friday, September 21, 2018

Recap & Commentary

Markets ended the week higher despite a further acceleration in the trade war between the U.S. and China. Both the S&P 500 and Dow Jones Industrial Average (DJIA) notched new record highs while international markets posted strong returns, thanks to a second consecutive weekly decline in the USD.

On Monday, President Trump announced a new round of tariffs on an additional $200B of Chinese goods; the initial tariffs will be 10% before increasing to 25% at the start of 2019. China immediately retaliated by introducing tariffs ranging between 5% and 10% on $60B of U.S. imports.

Interest rates continued to move higher with the 10-Year Treasury yield ending the week at 3.06%, its highest level since mid-May. The move back above the psychological barrier of 3.0% comes amid ongoing efforts by global central banks to normalize monetary policy. At its September meeting, the ECB announced it would slow the pace of its monthly asset purchases from €30B to €15B as it looks to conclude a quantitative easing program by year-end. On Friday, the Bank of Japan (BOJ) reduced its purchases of longer-dated bonds for the first time since July, resulting in Japanese yields reaching their highest levels since the BOJ announced its negative interest rate policy in January 2016. This week, the U.S. Federal Reserve is expected to raise interest rates for the third time this year. All of these moves reinforce the notion that interest rates will likely continue to move higher.

Ongoing Brexit negotiations suffered a setback when EU leaders, including EU President Donald Tusk and French President Emanuel Macron, criticized UK Prime Minister Theresa May’s current plan as unworkable. In response, May described negotiations as having reached an impasse, challenged EU leaders to produce a better plan, and revived the idea that, for the UK, no plan may be better than a bad plan.

Economic Bullet Points

Housing—August Housing Starts handily beat consensus after rising 9.2%, led by a sharp 29.3% increase in multi-family starts. However, single-family starts, the more important component of the reading, rose just 1.9%. Housing permits, the forward-looking component, fell a greater-than-expected 5.7%. Sales of Existing Homes were unchanged from July and missed consensus for the fifth consecutive month. YTD, total sales of existing homes are down 1.5%, with single-family homes down 1.0% and condos down 4.8%. In sum, housing continues to lag behind the general pickup in economic activity due mainly to rising home prices which have exacerbated affordability issues and dampened demand, especially among first-time buyers.

Leading Indicators—The index of leading economic indicators (LEI) posted a solid 0.4% advance in August driven by a surge in ISM manufacturing orders, gains in the stock market, and declines in unemployment claims. Housing aside, the LEI is pointing to a healthy finish for the 2018 economy.

Jobless Claims—All four key readings–weekly and 4-week average initial claims and weekly and 4-week average continuing claims–are at historic lows, which is consistent with a low unemployment rate and robust job growth.

 

Of Note

According to the Commerce Department, U.S. companies repatriated ~$170B in overseas cash during the second quarter. While that marked a significant increase from the ~$35B repatriated a year earlier, it was substantially less than the ~$294B in the first quarter immediately following the new tax legislation.

Market Indices Week of 9/21

S&P 500                            0.9%

Russell 2000                  -0.6%

MSCI EAFE                      2.9%

MSCI EM                          2.2%

Commodities                 2.4%

Barclay’s Agg.               -0.3%

US Dollar Index            -0.7%

10-Yr Yield                     3.07%

WTI Oil ($/bl)                     $71

Gold ($/oz)                     $1,199

The Week Ahead

  • GDP
  • Corporate Profits
  • New Home Sales
  • Durable Goods Orders
  • International Trade in Goods
  • Consumer Confidence
  • Jobless Claims

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