Last Week Review
Equity markets keep momentum going in 2018. Strong positive returns across the U.S. and developed ex-U.S. regions led global equities to a 0.9% weekly return, now up 3.3% year-to-date. Emerging market equities lagged with flattish returns but still remain positive year-to date at 3.3%. Oil prices surged to hit three-year highs for the second straight week backed by rising demand and OPEC production cuts. Beijing officials denied a recommendation to slow/stop the purchase of U.S. Treasury bonds but the 10-year U.S. Treasury yield still moved as high as 2.59% last week.
Central banks react to global economic recovery. Meeting minutes from the December European Central Bank (ECB) meeting revealed the central bank’s increased optimism around Europe’s growth outlook, which led some investors to believe the ECB could end its bond purchase program sooner than expected. The Bank of Japan (BOJ) reduced the amount of government bond purchases, sending the dollar down 0.5% against the yen. However, the decrease in bond purchases was modest and BOJ Governor Kuroda quickly dismissed the idea of further reducing accommodation. With regards to the Federal Reserve, Fed fund futures currently imply an 87% probability of a March rate hike, which increased at the end of last week after CPI moved higher to 2.2% year-over-year (y/y) from the prior level of 2.0% y/y.
Germany moves closer to coalition government. More than 100 days after the Bundestag elections, Germany continues to operate without an effective government. Late last week, Chancellor Angela Merkel announced progress has been made towards forming a “grand coalition” between the SPD party and her CDU/CSU party. Merkel explained that Germany would be working closer with France to strengthen Europe, which is similar to French President Emmanuel Macron’s vision for Europe. An SPD party conference must endorse formal coalition negotiations on 1/21. A failure in negotiations could lead Merkel to form a minority government or seek repeat elections.
Companies continue responding to tax reform. The corporate tax rate moving from 35% to 21% has investors monitoring how companies will handle their improved cash flow. Walmart announced it will be increasing hourly employee minimum wage from $9 to $11 and also giving employees a one-time bonus of up to $1,000. Corporate spending on capital expenditures, dividends, employees or other projects will be monitored in the Q4 earnings season. 26 S&P 500 companies (5%) have reported so far, with earnings growth of 16.0% y/y, exceeding expectations by 3.0%.
This Week Preview
Financials in focus next week for Q4 earnings. The financial sector struggled to grow earnings in Q3 with -8.9% growth. Citigroup (C), Bank of America (BAC), and American Express (AXP) report earnings mid-week, though results could be noisy due to impacts from tax legislation. UnitedHealth Group (UNH) from the healthcare sector reports Tuesday with Schlumberger (SLB) finishing the week off on Friday.
Government funding expires on Friday. Congressional leaders and President Donald Trump will look to work together to fund the government and fix the Deferred Action for Childhood Arrivals (DACA) program by the end of this week. Complex negotiations are likely to prevent the passage of a long-term spending bill, making a short-term resolution more likely, which would be the fourth stopgap measure since September.
Europe inflation expected to remain near prior levels. The Bank of England (BOE) will likely be looking for inflation to slow down on Tuesday after its recent interest rate hike. Surveys expect headline UK CPI and core CPI readings of 3.0% y/y and 2.6% y/y, both of which are close to prior levels. As the ECB works toward normalizing monetary policy, the central bank will be looking for a sustained uptick in inflation. Expectations for Europe headline CPI and core CPI are 1.4% y/y and 0.9% y/y, respectively.
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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.
 Source: Bloomberg, MSCI World ex-U.S. IMI returns 08Jan2018 – 12Jan2018.
 Source: Bloomberg, MSCI Emerging Market Equities Index returns 01Jan2018 – 12Jan2018.
 Source: Bloomberg, 12Jan2018.
 Source: CME Group, 30-Day Fed Fund Futures Index 12Jan2018.
 Source: Bloomberg, 12Jan2018.