Trade barbs, central banks meet and what effect will new tariffs have on the market? Find out more in this edition of “The Week in Review.”
Last Week Review
Global markets handle additional tariff and central bank news well. Global investors absorbed a slew of central banks updates as well as additional trade barbs exchanged between the U.S. and China. Overall, global equities saw a modest decline of 0.2% last week.1 U.S. equities pushed somewhat higher (0.8%),2 while non-U.S. developed market and emerging market equities fell by 1.3% and 1.5%, respectively.3 U.S. equities remain the clear leader year-to-date with a 7.7% return,4 while emerging markets (-5.8%)5 and non-U.S. developed markets (-1.1%)6 continue to sit in negative territory in 2018 so far. The 10-year U.S. Treasury yield (2.95%)7 ended the week mostly unchanged, where it currently sits 31 basis points above the 2-year U.S. Treasury yield (2.64%).8
Central banks meet market expectations for the most part. The Bank of Japan (BOJ), the Federal Reserve (Fed) and the Bank of England (BOE) all met last week. The Fed and BOE outcomes were in-line with expectations, while the BOJ struck a more dovish tone than expected. After recent rumors that it would turn more hawkish, the BOJ pledged to remain accommodative in addition to offering forward guidance, broadening the scope of its exchange-traded fund purchases, and widening the tolerance band on the 10-year Japan bond yield. In its meeting last Wednesday, the Fed reiterated its plan to gradually raise rates as the U.S. continues economic expansion with inflation near target levels. Markets continue to widely expect a rate hike in the September Fed meeting. Finally, the BOE’s interest rate hike placed its main policy rate at 0.75%, the highest level since the financial crisis. BOE Governor Mark Carney floated the possibility of further hikes in the future in order to pull inflation closer to the 2% target.
U.S. jobs report shows healthy labor market. Last Friday’s labor market data included 157k jobs added in July and upward revisions to May and June’s figures. Despite the below-consensus jobs added figure, wage growth was consistent with June’s 2.7% year-over-year (y/y) reading while the unemployment rate ticked down to 3.9%. In other U.S. economic data, Core Personal Consumption Expenditures (PCE) moved down slightly to 1.9% y/y after reaching 2.0% earlier this year.
Apple’s market cap hits the $1 trillion mark. Backed by a solid earnings beat, Apple (AAPL) became the first U.S. company to pass the $1 trillion market cap milestone. In the broader earnings season, 405 S&P 500 companies (81%) have reported results so far. Aggregate year-over-year earnings growth (25.2%) and revenue growth (10.2%) figures both continue to exceed consensus estimates.9
This Week Preview
Roughly 20% of companies left to finish off 2Q earnings season. In the rest of earnings season, many of the companies reporting earnings in the coming weeks sit in either the consumer discretionary or technology sectors. Earnings growth continues to be quite strong in the technology sector at 37.5% y/y. The consumer discretionary (19.3% y/y) and financials (22.7% y/y) sectors have also seen robust earnings growth.
Trade relations between the U.S. and China remain in the spotlight. The next U.S. round of tariffs on $16 billion worth of imports from China is expected to go into effect this week or shortly after. China is expected to hold a conference for its senior leadership where they will likely strategize on retaliations to the latest U.S. threats and tariff impositions such as China’s recent announcement of tariffs on $60 billion of U.S. goods. In addition, NAFTA negotiations are expected to occur over the next few weeks as well but details are needed to work out whether Canada will be included. Finally, the U.S. and Japan will meet on Thursday for a first round of bilateral trade negotiations.
Investors continue to monitor tariff impacts on economic data. China import/export data will be released on Wednesday with surveys expecting imports to increase and exports to decrease from prior levels. As the year progresses and more tariffs are imposed, investors will review these measures closely to see the true impact. Other economic data in focus this week includes U.S. inflation, where headline and core inflation are expected to remain near prior levels at 2.9% y/y and 2.3% y/y, respectively.
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Unless otherwise noted, all opinions expressed in this post are those of the author and do not necessarily represent the views of Northern Trust. Information contained herein is current as of the date appearing only and is subject to change without notice.
End Notes1. Bloomberg, MSCI World Index returns 30Jul2018 – 03Aug2018.
2. Bloomberg, MSCI U.S. Equities IMI Index returns 30Jul2018 – 03Aug2018.
3. Bloomberg, MSCI ex-U.S. Equities IMI Index & MSCI Emerging Market Equities Index returns 30Jul2018 – 03Aug2018.
4. Bloomberg, MSCI U.S. Equities IMI Index returns 02Janl2018 – 03Aug2018.
5. Bloomberg, MSCI Emerging Market Equities Index returns 02Janl2018 – 03Aug2018.
6. Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Janl2018 – 03Aug2018.
7. Bloomberg, 10-Year Treasury Rate 03Aug2018.
8. Bloomberg, In this analysis we are making a comparison between the difference of the 2-Year nominal Treasury rates versus the 10-Year nominal Treasury rates using data available as of 03Aug2018.
9. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 03Aug2018 from http://lipperalpha.financial.thomsonreuters.com/2018/08/sp-500-17q1-earnings-dashboard/.