November’s employment figures fall short of expectations while markets rallied following the news of a 90 day truce between the U.S. and China. Find out more in this edition of “The Week in Review.”
Last Week Review
Yield curve inverts between 3-year and 5-year Treasuries. We believe that last Monday’s inversion between 3-year and 5-year Treasuries has investors worried about a potential recession. Our research shows that each time the 2-year and 10-year Treasury yield curve has inverted1 over the last 40 years, a recession has occurred with a lag sometimes as long as two years. The spread between the 2-year and 10-year Treasury yields finished the week at 14 basis points2. Emerging market equities were the top returning region last week, though still with a loss of 1.3%3. U.S. and developed ex-U.S. equities fell 4.6% and 2.3%, respectively4, leading global equities 3.4% lower5. Year-to-date, global equities are down 5.4% with each major region currently in negative territory6.
Jobs added figure falls short of expectations. November’s employment figures showed the creation of 155k jobs and a downward revision of October’s number to 237k. Average hourly earnings and the unemployment rate both matched October’s readings at 3.1% year-over-year (y/y) and 3.7%, respectively. Also last week, Federal Reserve (Fed) Chair Jerome Powell’s testimony was cancelled in observance of former President George H. W. Bush’s funeral. With the final Fed meeting of 2018 less than two weeks away, investors will be closely following comments from Fed officials.
U.S. and China’s trade rift intensifies. Markets rallied last Monday following news of a 90-day trade truce between the U.S. and China. Monday’s gains quickly evaporated on Tuesday as investors worried about the lack of details surrounding the deal such as the amount of goods China would purchase from the U.S. in order to push back an increase in the tariff amounts. Negotiations were complicated further as Canada arrested a senior leader of Huawei Technologies at the request of the U.S. last week. The U.S. alleges that Huawei – a leading China technology company – has violated U.S. sanctions against Iran.
OPEC and Russia agree to oil production cut. The Organization of the Petroleum Exporting Countries (OPEC) and Russia, agreed to cut output by 1.2 million barrels a day. Oil prices rallied about 5% immediately after the announcement, before settling in for a 2.7% daily gain last Friday7. Markets were fairly skeptical of a deal throughout last week, as oil prices dropped about 2.5% last Thursday on top of a 30%-plus decline since early October8. The U.S. recently turned into a net exporter for the first time in 75 years with help from the shale boom. This shift highlights the changing dynamics of oil market suppliers and OPEC’s inability to affect price as it has in the past.
This Week Preview
UK Parliament members vote on Brexit agreement. European Union (EU) leaders have already agreed to the treaty that the UK will vote on this Tuesday. UK Prime Minister Theresa May has had the support of the Democratic Unionist Party (DUP) and a Commons majority of 13 until recently but the DUP among other parties has vowed to vote against the deal. May sees the threat of a second referendum or no deal as advantages that can help her pass the agreement. If the deal does not pass, possible outcomes include a vote of “no confidence” against May, another general election, or a second referendum. The UK is scheduled to exit the EU in March 2019, but the EU has the power to extend that further if Tuesday’s deal does not pass.
ECB expected to end asset purchase program by year-end. In this week’s meeting, the European Central Bank will likely confirm the conclusion of its asset purchase program, which in its final month is purchasing €15 billion worth of assets. Officials have consistently stated that a rate hike to move the policy rate above 0% will not occur before summer 20199. Investors will stay tuned for any guidance on the removal of monetary policy accommodation as inflation remains well below the 2% target10.
Flash PMI data expected to show slowing growth. Japan, Europe and the U.S. report flash Purchasing Managers’ Index (PMI) readings for December. Most regions have dropped from highs earlier in the year, reflecting slowing but still positive growth. December readings are expected to remain near the prior month’s figures.
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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.
1) An inverted yield curve is an interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the same credit quality.
2) 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 07Dec2018.
3) Bloomberg, MSCI Emerging Market Equities Index return 03Dec2018 – 07Dec2018.
4) Bloomberg, MSCI ex-U.S. Equities IMI Index return 03Dec2018 – 07Dec2018.
5) Bloomberg, MSCI Emerging Market Equities Index return 02Jan2018 – 09Nov2018
6) Bloomberg, MSCI ex-U.S. Equities IMI Index return 02Jan2018 – 09Nov2018.
7) Bloomberg. S&P 500® Consumer Staples Index performance 01Oct2018-07Dec2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
8) Bloomberg. S&P 500® Consumer Staples Index performance 03Dec2018 – 07Dec2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® consumer staples sector.
9) Bloomberg, Fed Funds Futures Index 07Dec2018. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.
10) Bloomberg, Fed Funds Futures Index 07Dec2018. Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy.
Past performance is no guarantee of future results. It is not possible to invest directly in any index and index performance returns do not reflect any management fees, transaction costs or expenses.