Weekly Market Update - February 26

Posted by FlexShares on Feb 26, 2018 10:00:00 AM


Fed reveals confidence, signs of expansion and what will Powell say? Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities begin to rebound after two-week slide. Emerging market equities drove the recovery returning 1.4% for the week,1 followed by U.S. and global equities at 0.5% and 0.3% respectively.2 Developed ex-U.S. equities struggled as the only major region in negative weekly territory.3 Year-to-date (YTD) all regions remain positive4 and are led by emerging market equities at 4.8%.5 Developed ex-U.S. equities lag all regions at 0.6%.6 U.S. Treasury yields climbed throughout the week with the 10-year yield touching 2.95% before finishing the week at 2.87%.7 The 2-year yield reached a maximum of 2.27% before dropping down to 2.24% on Friday.8 We believe investors will keep a close watch on the 10-year as a rise above 3% may put additional pressure on equity valuations.

Federal Reserve (Fed) minutes reveal confidence in growth and inflation. We believe that the minutes reflect that Fed officials raised their growth forecast from December to January based on higher expected benefits from the tax bill and the large government spending package. While the minutes appear bullish, there was no definitive plan to increase the pace of interest rate normalization. We believe a March rate hike to the 1.5% – 1.75% range is fully priced into the markets with investors expecting at least 1 more in 2018. Meanwhile in Europe, the European Central Bank (ECB) released January’s meeting minutes and expressed concerns on dollar weakness. ECB President Mario Draghi feared that this would lead to lower European exports and an increased difficulty in reaching the ECB’s 2% inflation target. The ECB is currently purchasing €30 billion in bonds every month and will continue the plan until at least September.

Flash PMI data remains expansionary. We believe Manufacturing Purchasing Manager’s Index (PMI) figures continue to reflect a positive global growth outlook with all major regions in expansionary territory (above 50).9 With the exception of the U.S., all regions experienced modest decreases from prior readings which were in line with surveys. Our analysis is that some investors in the U.S. feared that too much growth would bring inflation but the uptick in the U.S. PMI above surveys was not large enough to inspire further inflation fears.

Earnings season nears the finish line. 453 S&P U.S.500 companies (91%) have reported earnings thus far, with 15% y/y earnings growth topping expectations by 4.8%.10 The technology sector has led the charge, returning 7.8% YTD driven by a strong earnings season with 21.9% y/y earnings growth.11 Despite positive earnings growth of 9.6% y/y from the real estate sector, it continues to struggle YTD, dropping 6.8% from the end of 2017.12

This Week Preview

Retail companies make up a bulk of earnings reports. Many retail companies including Kohl’s (KSS), Macy’s (M), and Lowe’s (LOW) report earnings throughout the week. Other notable companies reporting include Berkshire Hathaway (BRK.B) and Salesforce.com (CRM).

Fed Chair Jerome Powell testifies before Congress. Powell’s testimony will likely include the Fed’s thoughts around the uptick in wage growth and inflation not captured in last week’s minutes’ release. The Fed forecasted three rate hikes at the beginning of the year. Investors will focus on how rising growth and inflation numbers could influence rate normalization down the road. Core PCE, the Fed’s preferred inflation metric, is expected to remain stable at 1.5% year-over-year (y/y).13 We believe stability in the core PCE may temporarily calm investor worries about inflation rising too fast. Germany and Europe are both expecting slight downticks in their headline CPI figures.

No party holds majority ahead of Italy’s general election. The latest polls place the center-right movement ahead of the 5-Star and center-left movement with 36.8% of the vote. Polling estimates show that no coalition has enough numbers to gain a majority in the general election held on March 4. Political experts do not expect Italy’s instability to have a substantial impact on Europe, especially after the populist movement calling for a referendum significantly quieted down since a year ago.

Click here to view the full report.

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.

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End Notes

  1. 1. Bloomberg, MSCI World Index returns 05Feb2018 – 16Feb2018.
  2. 2. Bloomberg, MSCI World Index returns 12Feb2018 – 16Feb2018.
  3. 3. Bloomberg, MSCI Emerging Market Equities Index returns 05Feb2018 – 16Feb2018.
  4. 4. Bloomberg, MSCI Emerging Market Equities Index returns 12Feb2018 – 16Feb2018.
  5. 5. Bloomberg, MSCI U.S. Equities IMI Index returns 12Feb2018 – 16Feb2018.
  6. 6. Bloomberg, MSCI World ex-U.S. IMI Index returns 12Feb2018 – 16Feb2018.
  7. 7. Bloomberg, MSCI World ex-U.S. IMI Index returns 2Jan2018 – 16Feb2018.
  8. 8. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 16Feb2018.
  9. 9. Bloomberg, 10-Year Treasury Rate 16Feb2018.
  10. 10. Bloomberg, 2-Year Treasury Rate 16Feb2018.
  11. 11.Leubsdorf, B. S. Gained 200,000 Jobs in January as Wages Picked Up. Wall Street Journal. Retrieved Feb 18, 2018 from https://www.wsj.com/articles/u-s-gained-200-000-jobs-in-january-as-wages-picked-up-1517578320.
  12. 12. Bloomberg, 12-Month Percentage Change – Headline Inflation, 18Feb2018. Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy.
  13. 13. Bloomberg, 12-Month Percentage Change – Core Inflation, 18Feb2018. Core inflation excludes goods with high price volatility, such as food and energy within an inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. This measure of core inflation systematically excludes food and energy prices because, historically, they have been highly volatile and non-systemic.
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