Weekly Review Brief - Feb 19, 2019

Posted by FlexShares on Feb 19, 2019 2:07:11 PM

Weekly Review Image 2-19-2019

Coca-Cola (KO) experienced its largest single intraday decline since the financial crisis as unit case volume fell in the Americas in December. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities move higher on trade optimism. Though no deals were reached and no tariff escalation delays were agreed upon in the trade front between the U.S. and China, continuing discussions were enough to temporarily pacify worried investors and move markets higher. Of the major regions, the U.S. (2.7%) and non-U.S. developed markets (2.0%) climbed the highest last week1. In 2019 so far, global equities are returning 9.6%, led by U.S. equities at 12.0%2. Non-U.S. developed market and emerging market equities have contributed as well with mid to upper- single-digit returns3.

China trade data surpasses expectations. Heading into last week, surveys showed declines to January imports and exports. Both data points surprised to the upside as imports declined less than expected and exports increased year-over-year. As the U.S.-China trade saga continues, metrics painting a picture of economic growth will remain under the microscope. In discussions, China has offered to purchase semiconductors in addition to agricultural products in order to delay the tariff escalation on March 1. The offer has not satisfied U.S. representatives who are looking to see concessions on China’s handling of intellectual property. Officials will continue these talks next week where both countries will look to reach areas of agreement.

Delayed December retail sales comes in soft. The government shutdown caused a delay in December’s retail sales report, which came in lower than economist surveys predicted. Such a low figure has caused some investors to question the credibility of the data, which may have been undercounted due to the shutdown. Retail sales, higher initial jobless claims and last Wednesday’s contained inflation report, support the Fed’s decision to pause at its last meeting. Friday’s decision by Congress prevented another shutdown and will fund the government through September likely avoiding any more delays to important economic indicators. Meanwhile in the UK, Prime Minister Theresa May’s Brexit plan was rejected again, increasing the chances the UK will delay the March 29 deadline or leave the European Union without an agreement.

Coca-Cola expects headwinds in 2019. Coca-Cola (KO) experienced its largest single intraday decline since the financial crisis as unit case volume fell in the Americas in December. Rising prices to offset increasing costs and a consumer shift away from sugary drinks are both challenges Coke will face in 2019. The company will look to grow its non-sugary brands to capture changing consumer taste. So far, 396 S&P 500 companies (79%) have reported earnings with aggregate year-over-year earnings growth of 11.1% and revenue growth of 6.6%4.

This Week Preview

Flash PMIs will be released across the major regions. Slowing economic growth expectations for 2019 have been a main investor focus recently. Flash Purchasing Managers’ Index readings throughout the week will help gauge the health of the manufacturing sector. Economists expect Europe and Germany to come in near prior levels at 50.3 and 49.9, respectively. Regions outside the U.S. continue to flirt with a reading of 50, the dividing line between improving and declining economic conditions while the U.S. is expected to remain comfortably in expansionary territory at 55.0.

Following rate pause, Fed minutes likely to highlight balance sheet. After the Federal Reserve’s pivot from gradual interest rate hikes in 2018 to a pause in 2019, minutes from January’s Fed meeting may focus on the size of the balance sheet. The portfolio has fallen from $4.5 trillion to $4.0 trillion since the winding down process began in 20175. Fed governors recently stated that the balance-sheet runoff should probably end in 2019. The debate centers on issues around demand for reserves held at the Fed rather than adjusting the level of economic stimulus.

Inflation projected to remain low. Most central banks have indicated a pause from any monetary policy tightening due to a lack of inflation. Consumer Price Index figures are likely to continue well below most central banks’ 2% target. Headline and core inflation figures are expected to remain near prior levels in Japan, Germany and Europe.

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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 Notes

1) Bloomberg, MSCI U.S. Equities IMI Index returns 11Feb2019-15Feb2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 11Feb2019-15Feb2019.

2) MSCI ACWI (All Country World Index) returns 02Jan2019 – 15Feb2019. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2019 – 15Feb2019

3) Bloomberg MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 02Jan2019 – 15Feb2019.

4) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 15Feb2019 from http://lipperalpha.financial.thomsonreuters.com/2019/02/sp-500-17q1-earnings-dashboard/.

5) Federal Open Market Committee. (January 30, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 18Feb2019 from https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf.

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.

Tags: Weekly Market Update