Heading into earnings season, numerous companies have announced guidance cuts or restructuring across multiple industries including retail, autos and transportation. Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities continued strong start to 2019. Following three days of U.S.-China negotiations on the implementation and enforcement of a trade deal, global equities pushed 2.9% higher last week1. Another round of talks may be held later in January, but China’s treatment of intellectual property remains a key issue. Emerging market equities (3.6%) led all major regions last week, followed by positive returns out of non-U.S. developed markets (3.2%) and the U.S. (3.0%)2. All major equity regions are up around 4% for the year3, leading to a year-to-date global equity return of 3.9%4. Reviewing fixed income markets, high yield credit spreads5 have dropped 92 basis points6 since the January 3 peak after a period of spread widening that began in mid-December7. The spread tightening has resulted in a 3.1% year-to-date return8 for the high yield asset class, only modestly behind global equities.
Fed Chair Powell reinforces patience on policy tightening. Following the release of December’s Federal Reserve meeting minutes, Fed Chair Jerome Powell confirmed that the central bank will be patient in future monetary policy decisions. With Core Personal Consumption Expenditures (PCE) still below the Fed’s 2% target, Fed officials will look to digest more economic data before further tightening. A more patient Fed remains a key driver of the positive start to the year in equity markets. Fed funds futures give a 69% probability that Fed policy remains unchanged in 20199.
Multiple companies across sectors cut guidance. Heading into earnings season, numerous companies have announced guidance cuts or restructuring across multiple industries including retail, autos and transportation. Macy’s experienced an 18% stock price decline last Thursday after cutting 2019 guidance following soft December sales10. A weak December caused a broad-based sell-off among other retail companies as well. Carmakers Ford and Jaguar are restructuring by cutting jobs and closing plants to focus on higher profit segments. Also facing uncertainty, transportation companies American Airlines and Delta cut revenue estimates for 2019 in addition to FedEx’s earlier guidance cut. However, companies may be trimming guidance because expectations grew too high rather than in anticipation of a sharp economic slowdown.
U.S. headline inflation dips below core inflation. December’s headline Consumer Price Index (CPI) at 1.9% year-over-year (y/y) dipped below the core CPI level (2.2% y/y), though both metrics were in-line with expectations. Energy, a more volatile component of headline CPI, makes up almost 10% of the data point. Oil fell about 11% in December11 which likely contributed to the drop-off in headline levels.
This Week Preview
Earnings season begins with banks. Banks out of the financials sector will commence earnings season for 4Q 2018. Citigroup (C) will report on Monday followed by J.P. Morgan (JPM) and Wells Fargo (WFC) on Tuesday. Bank of America (BAC) and American Express (AXP) release earnings mid-week. Other notable companies this week include UnitedHealth Group (UNH) out of the health care sector and Schlumberger (SLB) out of the energy sector to close the week. S&P 500 fourth quarter earnings growth is expected to end up at 11.4% y/y12. This decline from earnings growth, around 25% in previous quarters, is likely due to the waning benefits from the tax cuts enacted at the beginning of the year as well as slowing but positive economic growth.
UK Parliament votes on Brexit deal. This Tuesday UK Prime Minister Theresa May will hold a vote to determine the terms of Brexit. A disjointed parliament with competing objectives and different definitions of success along with an unforgiving European Union make passing a Brexit deal difficult for May. The deal is unlikely to pass which could lead to further negotiations and an eventual delay of the late-March Brexit deadline.
No major changes anticipated in global inflation data. Europe, Germany, Japan and the UK will post December inflation figures that are expected to remain mostly in line with prior readings except for decreases in headline CPI in Europe and Japan. Industrial production and retail sales from China will conclude the week and provide insights on the magnitude of the slowdown Apple CEO Tim Cook alluded to earlier this year.
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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) Bloomberg, MSCI World ex-U.S. IMI Index returns 07Jan2019 – 11Jan2019
2) Bloomberg, The major regions returns are the MSCI U.S. Equities IMI Index, MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 07Jan2019 – 11Jan2019.
3) Bloomberg, The major regions returns are the MSCI U.S. Equities IMI Index, MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 02Jan2019 – 11Jan2019.
4) Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2019 – 11Jan2019.
5) Bloomberg, The major regions returns are the MSCI U.S. Equities IMI Index, MSCI ex-U.S. Equities IMI Index and the MSCI Emerging Market Equities Index returns 02Jan2019 – 11Jan2019.
6) Credit spread is the difference in yield between one debt security and another debt security with the same maturity but of lesser quality.
7) Basis Point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
8) Bloomberg Barclays Global High Yield Total Return Index value for the period of 07Jan19 – 11Jan19.
9) Bloomberg Barclays Global High Yield Total Return Index value for the period of 02Jan19 – 11Jan19.
10) Bloomberg, Fed Funds Futures Index 11Jan2019. 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.
11) Bloomberg, Macy’s Inc. (M) 10Jan2019
12) Bloomberg WTI Crude Oil value for the period of 03Dec2018-31Dec2018.
13) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 11Jan2019 from http://lipperalpha.financial.thomsonreuters.com/2019/01/sp-500-17q1-earnings-dashboard/
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.