Weekly Review Brief - Feb 25, 2019

Posted by FlexShares on Feb 25, 2019 4:02:27 PM

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As the largest retailer in the U.S., Walmart’s (WMT) success in the recent holiday season relieved investors’ fears about the state of the retail. Find out more in this edition of “The Week in Review.”

Last Week Review

China offers additional purchase of agricultural goods. With the March 1 tariff escalation deadline approaching, China offered to purchase an annual $30 billion more in agricultural products from the U.S. to prevent an increase to the tariff rate1. If U.S. officials accept this offer and delay the increase in tariff rates, the chief issue of China’s handling of intellectual property will remain. Officials also must decide how they will enforce China’s commitment to purchase additional U.S. goods. Global equities moved 1.2% higher last week on the backs of strong emerging market (2.7%) and non-U.S. developed market (1.7%) performance2. Looking at year-to-date equity market performance, global equities are up 10.9%, led by U.S. equities at 12.8% and followed by near double digit returns in non-U.S. developed and emerging market equities3.

Manufacturing metrics fall across the board. Slowing economic growth expectations for 2019 have been realized through the drop in manufacturing Purchasing Managers’ Index (PMI) data as Japan, Germany, and Europe all fell into contractionary territory (below 50). The U.S. also declined in February to 53.7, but remains comfortably in expansionary territory. The declines in the manufacturing PMI were not realized in the service sector as PMIs in the U.S. and Europe surprised to the upside and remain above 50. Reviewing inflation, core and headline inflation across a few regions were in line with economist surveys and remain well below most central banks’ 2% target.

Fed minutes discuss end of balance sheet reduction. The Federal Reserve (Fed) meeting minutes from January signaled that the majority of officials would like to finish reducing the $4 trillion balance sheet in the second half of the year4. The Fed highlighted global economic risks to the downside as it shifted from a sequence of gradual rate hikes in 2018 to a pause in 2019. Global risks include trade tensions between the U.S. and China, as well as the foreign policy decisions on Brexit leading to slower growth. Many officials cited that these risks could also lead to higher-than-expected inflation, which has been below the Fed’s 2% target for more than 95% of the last decade5.

Walmart reveals largest rise in holiday sales in last 15 years. As the largest retailer in the U.S., Walmart’s (WMT) success in the recent holiday season relieved investors’ fears about the state of retail after the sharp drop in retail sales reported the week prior. These developments helped raise annual revenues about 3% in 20186. Reviewing U.S. companies as a whole, 448 S&P 500 companies (90%) have reported earnings with aggregate year-over-year earnings growth of 11.6% and revenue growth of 6.4% for the fourth quarter in 20187.

This Week Preview

Earnings season wraps up. About 10% of S&P 500 companies are left to report earnings with the majority of the companies coming from the consumer discretionary sector. For the fourth quarter 2018, both earnings and revenue have surprised to the upside with communication services reporting the highest earnings growth (excluding energy). Notable companies posting earnings this week include Home Depot (HD) out of consumer discretionary and Berkshire Hathaway (BRK/B) out of financials.

March 1 tariff escalation date approaches. Officials from the U.S. and China are likely to continue negotiating leading up to the March 1 tariff escalation deadline. Investors will follow last minute negotiations closely to see if China’s offer to shrink the U.S. trade deficit by increasing purchases of U.S. agricultural and energy products, will be enough to delay the escalation of tariffs. If the offer is not accepted, tariffs on $200 billion of Chinese goods will increase from 10% to 25%8.

Powell testimony may unveil more balance sheet clues. January’s Fed minutes mentioned officials agreeing the reduction of the balance sheet should end in the second half of 2019, but left out specific details on the plans. Investors will look for more specifics on the balance sheet in Fed Chair Jerome Powell’s Congress testimony this week. In economic data this week, December’s delayed core personal consumption expenditures data is expected to remain at 1.9% y/y. Consumer confidence in the U.S. and Europe will be followed closely after declines in growth data last week.

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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 News. China to Propose $30 Billion More U.S. Agriculture Purchases. Retrieved 21Feb2019 from https://www.bloomberg.com/news/articles/2019-02-21/china-said-to-propose-30-billion-more-u-s-agriculture-imports

2) MSCI ACWI (All Country World Index) returns 19Feb2019 – 22Feb2019. Bloomberg, MSCI Emerging Market Equities Index returns 19Feb2019 – 22Feb2019. Bloomberg MSCI ex-U.S. Equities IMI Index returns 19Feb2019 – 22Feb2019.

3) MSCI ACWI (All Country World Index) returns 02Jan2019 – 22Feb2019. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2019 – 22Feb2019. Bloomberg MSCI ex-U.S. Equities IMI Index returns 02Jan2019 – 22Feb2019.

4) Federal Open Market Committee. (January 30, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 22Feb2019 from https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf.

5) Federal Open Market Committee. (January 30, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 22Feb2019 from https://federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf.

6) Bose, Nandita. Walmart holiday-quarter sales jump, says consumers still spending. Reuters. Retrieved on 19Feb2019 from https://yahoo.com/news/strong-u-economy-boosts-walmart-162856553.html

7) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 22Feb2019 from http://lipperalpha.financial.thomsonreuters.com/2019/02/sp-500-17q1-earnings-dashboard/.

8) Lee, Don. Trump sees ‘good chance’ of trade deal with China as talks go into the weekend. Retrieved on 22Feb2019 from https://www.latimes.com/business/la-fi-us-china-trade-trump-tariffs-20190222-story.html

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