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Week in Review

Week Ending: Friday, September 7, 2018

Recap & Commentary

Markets moved lower over the course of the week pressured by several factors. While headlines were largely dominated by politics and the confirmation hearings for Supreme Court nominee Brett Kavanaugh, investors were primarily focused on emerging markets and trade.

Emerging markets officially entered bear market territory, down 20% from their late-January high. Turkey and Argentina have been featured prominently in the selloff (for different reasons), but the pressure has been more widespread. South Africa unexpectedly slipped into recession in the second quarter, while Indonesia’s currency fell to levels not seen since the Asian financial crisis in the late 1990s. As a result, those two countries have seen a relatively sharp increase in their bond yields along with bellwethers Brazil and Russia.

Trade talks between the U.S. and Canada continued without significant progress. President Trump stated that he is willing to impose auto tariffs on Canada if it does not concede to U.S. demands regarding NAFTA. On Friday, Trump intimated that he is prepared to levy tariffs on all Chinese imports on “short notice”. Concerns about the effects of additional tariffs on China’s economic growth have also weighed on emerging markets.

Friday’s employment report revealed an hourly wage growth of 2.9% Y/Y, the fastest pace since 2009. Continued strong job creation and accelerating wage growth reinforce the notion that the Fed will raise rates in December. Market expectations for a December rate hike increased 5% to 76% following the report’s release.

Economic Bullet Points

Manufacturing—U.S. manufacturing remained robust in August despite expanding global trade tensions which have not yet appeared to have a meaningful adverse effect on either production or cap-ex plans this year.  To support activity, manufacturers have gone on a hiring spree in 2018, adding an average of 28K workers per month, the fastest pace since 1998. Price pressures, however, were also elevated. Specifically, suppliers have passed on tariff-associated price increases, which are now getting baked into 2019 price negotiations, and producers are exhibiting greater pricing power amid tighter manufacturing capacity constraints.

Services—The ISM Non-Manufacturing index topped expectations after it displayed a sharp acceleration in overall growth in August, in line with what was seen in the manufacturing sector. The current activity, new orders, and backlog sub-indices each edged higher during the month indicating a broad-based pick-up in action. While the PMI Non-manufacturing index showed a solid, but more muted, result, respondents in both surveys generally reported broad service sector strength.

International Trade—The nation’s trade deficit widened in July to a greater-than-expected $50.1 billion versus a revised $45.7 billion in June. The important takeaway is that July’s deficit was much deeper than the $44.6 billion monthly Q2 average and is expected to have 1.0% or better drag on Q3 GDP figures.

Jobless Claims remained low and consistent with a robust, healthy labor market.

Of Note

September 15 will mark the 10th anniversary of Lehman Brothers’ collapse. The bankruptcy remains the largest in U.S. history. At the time of its filing, Lehman had over $600B in assets, many of which were tied to subprime mortgage securities.

Market Indices Week of 9/7

S&P 500                          -1.0%

Russell 2000                  -1.6%

MSCI EAFE                    -2.9%

MSCI EM                         -3.1%

Commodities                -1.3%

Barclay’s Agg.               -0.5%

US Dollar Index              0.2%

10-Yr Yield                      2.94%

WTI Oil ($/bl)                    $68

Gold ($/oz)                     $1,199

The Week Ahead

  • Housing Starts
  • Existing Home Sales
  • Leading Indicators
  • Jobless Claims


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