Last Week Review
Global equities pushed higher for the week. Global equities returned 1.1% last week[i], with another week of positive returns for the global index. Emerging markets gained 1.9%,[ii] along with modest positive returns in the United States (0.8%)[iii] and non-U.S. developed markets (1.2%).[iv] Year-to-date returns across the major regions are relatively close so far, with emerging markets leading at 6.2%[v], followed by the United States at 5.0%[vi] and non-U.S. developed markets at 4.6%.[vii] The 10-year U.S. Treasury yield moved higher last week to 2.66%, its highest level since mid-2014.[viii]
U.S. government shutdown. Unable to reach a deal to maintain funding, the U.S. government shut down over the weekend – the fourth time in the past 25 years (also occurred twice in 1995 and in 2013). Investors appeared unfazed heading into the standoff, with the S&P 500 up 0.4% on Friday.[ix]
Europe inflation ticks below prior levels. Inflation in the UK dropped below prior levels, with December headline and core CPI coming in at 3.0% year-over-year (y/y) and 2.5% y/y, respectively.[x] After hiking rates in November, we believe that the Bank of England (BOE) will look for a continued inflation descent toward the 2% target. Europe’s headline CPI data came in below prior levels as well and still lies below target.[xi] We believe that the European Central Bank (ECB) will look for a sustained increase in inflation to accompany the improved growth outlook as it plans monetary policy normalization down the road.
Powell appears on track for Fed Chair. The Senate Banking Committee approved Jerome Powell for Federal Reserve (Fed) Chair for the second time after his nomination expired at the end of 2017 by a vote of 22-1. A full Senate confirmation hearing is still needed before Powell can assume the role of Fed Chair starting on February 3. Many professional investors utilize the Forward Rate Curve to determine the probability of a Federal Reserve (Fed) rate hike and about how the market is feeling about the future movements of interest rates. The Forward Rate Curve is calculated extrapolating from the risk-free theoretical spot rate. The current Forward Rate Curve implies that the possibility of a March Fed rate hike has increased recently to 88.2%[xii], though markets are still expecting close to two hikes in 2018, while the Fed is expecting three.[xiii]
Apple announces spending plan. In response to tax legislation, Apple plans to repatriate part of its $252 billion in cash to invest $30 billion in capital spending and create more than 20,000 jobs.[xiv] Taking a look at fourth quarter earnings, 53 S&P 500 companies (11%) have reported so far, with earnings growth of 13.0% y/y, exceeding expectations by 3.0%.[xv]
This Week Preview
Industrials sector takes stage this week. A bulk of the companies reporting earnings this week come out of the industrials sector. Notable names include Union Pacific Corp (UNP), General Electric (GE), 3M (MMM), Caterpillar (CAT), and United Technologies (UTX). Consumer discretionary companies Comcast (CMCSA) and Starbucks (SBUX) report Wednesday and Thursday. Other companies posting earnings this week include Johnson & Johnson (JNJ), Verizon (VZ), Proctor & Gamble (PG), and Intel (INTC).
Investors look for clues on future BOJ and ECB policy changes. The Bank of Japan (BOJ) meets on Tuesday with interest rate policy expected to remain unchanged. Many investors do not expect the BOJ to tighten policy until 2019 or later. The BOJ also releases an updated economic growth forecast. The ECB meets on Thursday this week and is expected to keep interest rates at 0%. Investors will be looking for signals that the ECB may be looking to take steps to further normalize policy in the near future.
Flash PMI data expected to remain near prior levels. Flash Purchasing Managers’ Index (PMI) data will be released starting on Tuesday this week. We believe all major regions are expected to remain in expansionary (above 50) territory and reflective of a synchronized global growth environment. Consensus expectations call for flash manufacturing PMI readings of 55.0 and 60.3 in the United States and Europe, respectively.[xvi]
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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.
[i] Bloomberg, MSCI ACWI (All Country World Index) returns 16Jan2018 – 19Jan2018.
[ii] Bloomberg, MSCI Emerging Market Equities Index returns 16Jan2018 – 19Jan2018.
[iii] Bloomberg, MSCI U.S. Equities IMI Index returns 16Jan2018 – 19Jan2018.
[iv] Bloomberg, MSCI World ex-U.S. IMI Index returns 16Jan2018 – 19Jan2018.
[v] Bloomberg, MSCI Emerging Market Equities Index 02Jan2018 – 19Jan2018.
[vi] Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 19Jan2018.
[vii] Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2018 – 19Jan2018.
[viii] Sjolin, Sara & Sunny Oh. “10-Year Treasury Yield Tops 2.6%, Closes at More-Than-3-Year High.” MarketWatch. 18Jan2018. https://www.marketwatch.com/story/us-10-year-yield-tops-26-for-first-time-since-march-2018-01-18.
[ix] Bloomberg, S&P500 Index 19Jan2018.
[x] Office for National Statistics. “Inflation and Price Indices.” 16Jan2018 – 19Jan2018.
[xi] European Central Bank. “Harmonised Index of Consumer Prices (HICP).” 16Jan2018 – 19Jan2018.
[xii] Bloomberg. Bloomberg calculates a forward rate curve at any given time by extrapolating from the risk-free theoretical spot rate. Forward rates are also known as implied forward rates.
[xiii] Condon, Christopher & Craig Torres. “Fed Raises Rates, Eyes Three 2018 Hikes as Yellen Era Nears End.” Bloomberg. 13Dec2017. https://www.bloomberg.com/news/articles/2017-12-13/fed-raises-rates-while-sticking-to-three-hike-outlook-for-2018
[xiv] Mickle, Tripp. “Apple’s Big Cash Winners: Shareholders.” Wall Street Journal. 19Jan2018. https://www.wsj.com/articles/apples-big-cash-winners-shareholders-1516357803.
[xv] Pisani, Bob. “High Expectations Will Put Pressure on Companies This Earnings Season.” CNBC. 10Jan2018. https://www.cnbc.com/2018/01/10/high-expectations-will-put-pressure-on-companies-this-earnings-season.html.
[xvi] Trading Economics. “Inflation Rate – Forecast – 2018 – 2020.” 19Jan2018. https://tradingeconomics.com/forecast/inflation-rate