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Week in Review

Week Ending: Friday, September 28, 2018

Recap & Commentary

Markets ended the week lower, ostensibly due to trade concerns as the latest round of tariffs between the U.S. and China officially went into effect on Monday. While headlines generally focused on hearings surrounding Supreme Court nominee Bret Kavanaugh, markets had plenty of fundamental information to digest.

Monday saw a slew of merger announcements. Satellite radio company Sirius XM agreed to acquire music streaming service Pandora for $3.5B; gold producer Barrick Gold agreed to buy Randgold Resources for $6B; U.S. fashion company Michael Kors agreed to buy luxury designer Versace for $2.1B; and Comcast received approval from regulators for its $39B acquisition of  British broadcast company Sky.

On Wednesday, in a widely anticipated move, the U.S. Federal Reserve announced a 0.25% increase to the Fed Funds rate, bringing it to a range of 2.00-2.25%. From its accompanying statement, the Fed removed language about monetary policy being “accommodative”, thereby supporting a strong labor market and return to 2% inflation. At his press conference following the meeting, Fed Chair Jay Powell stated that the removal of the language did not signal “any change in the likely path of policy” but instead, was a “sign that policy is proceeding inline” with expectations. Updated Fed projections show that policymakers expect to raise rates once more before the end of the year. Markets currently expect the next increase to occur in December.

Crude oil prices continued their recent rally, with Brent oil (the global benchmark for oil) reaching its highest level in four years following a decision by OPEC and Russia to maintain current production levels. In recent weeks, Brent oil prices have reached four-year highs based on expectations of the renewed U.S. sanctions on Iran resulting in a reduction in global supply of as much as 1.5 million barrels/day (mbd).

Economic Bullet Points

The third estimate of second-quarter GDP growth remained unchanged at 4.2%. A small downward revision to private inventory investment was offset by small upward revisions to most other GDP components. At 4.2%, second-quarter GDP growth was the strongest since 3Q14 when it registered at 4.9%.

Housing data continued to reinforce the notion that the sector remains a weak spot in an otherwise strong economy. Nationally, prices for existing homes, as measured by the Case-Shiller price index, continue to moderate with some cities seeing outright contraction. New home sales for August were in line with expectations, but that was offset by significant downward revisions to the prior two months.

Business spending, as measured by Durable Goods Orders, rose in August, easily exceeding estimates, thanks to strong civilian aircraft orders. Core business spending, however, fell 0.5% vs. analyst expectations for a 0.4% gain. The decline follows four consecutive months of strong gains.

Consumers remain upbeat as measured by confidence and sentiment data, both of which continue to register at very high levels. Worth noting, however, was the assessment of whether or not jobs are hard to find, which deteriorated during the month. Overall, the consumer data bodes well for the upcoming holiday retail season.

Of Note

The U.S. and Canada struck an 11th-hour deal, quite literally, to replace NAFTA with a new trilateral trade agreement named the United States Mexico Canada Agreement (USMCA). The deal, which is expected to be signed by all three countries by the end of November, will ultimately need to receive Congressional approval.

Market Indices Week of 9/28

S&P 500                          -0.5%

Russell 2000                  -0.9%

MSCI EAFE                       -1.1%

MSCI EM                         -0.3%

Commodities                  1.0%

Barclay’s Agg.                 0.2%

US Dollar Index               1.0%

10-Yr Yield                      3.06%

WTI Oil ($/bl)                     $73

Gold ($/oz)                      $1,187

The Week Ahead

  • ISM Manufacturing
  • ISM Services
  • Construction Spending
  • Factory Orders
  • International Trade
  • Employment Situation

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