Last Week Review
Global equities led higher by non-U.S. markets. Global equities led higher by non-U.S. markets. Global equities finished the week up 1.4%, boosted by a 2.7% return in emerging markets and a 1.6% return in non-U.S. developed markets. U.S. equities gained 1.0% after brushing off concerns over the U.S. government shutdown which ended last Monday with a short-term agreement to fund the government through February 8. Emerging market equities continued to lead major regions in 2018 with an 8.8% return. Earnings season continued in the United States, where 133 S&P 500 companies (27%) have reported so far, with earnings growth of 10.9% year-over-year (y/y), beating expectations by 2.2%.
Globalization and trade in the spotlight last week. On Monday, the United States imposed tariffs on solar panels and washing machines up to 30% and 50%, respectively, which will be in place for the next few years. Some investors are concerned that these actions could lead to escalating trade tensions if other countries such as China take reciprocating action. In addition, markets fluctuated at times throughout the week based on comments made by U.S. officials at the World Economic Forum in Davos including Commerce Secretary Wilbur Ross’s statement on trade and both Treasury Secretary Steven Mnuchin’s and President Donald Trump’s comments on the U.S. dollar. Other major developed market leaders reiterated their commitment to globalization. The U.S. dollar was down about 2% for the week.
No changes in policy at BOJ and ECB meetings. As expected, the Bank of Japan (BOJ) and European Central Bank (ECB) both left interest rate policy unchanged in meetings held last week. ECB President Mario Draghi said the ECB will continue on a path to slowly remove stimulus and plans on keeping rates steady well after the asset purchase program concludes. We believe a strong euro could make it more difficult for European inflation to reach the ECB’s 2% target. BOJ Governor Haruhiko Kuroda reiterated the BOJ’s accommodative approach to monetary policy, which helped ease concerns that the BOJ may be looking to tighten policy in 2018. Meanwhile in the United States, the Senate confirmed Jerome Powell to be the next Federal Reserve Chair. He will begin his four-year term in early February.
Flash PMI readings remain strong across major regions. Flash manufacturing Purchasing Manager’s Index (PMI) data in the United States and Japan came in at 55.5 and 54.4, respectively, slightly above last month’s readings. The flash manufacturing PMI data in Germany (61.2) and Europe (59.6) saw decreases from their respective prior levels, though both figures remain very strong overall.
This Week Preview
Earnings season continues with a focus on large tech companies. Many of the companies reporting earnings this week come from the technology sector including Apple (AAPL), Facebook (FB), Alphabet (GOOGL), and Microsoft (MSFT). Other noteworthy companies reporting include McDonald’s (MCD), AT&T (T), Amazon (AMZN), Chevron (CVX), Pfizer (PFE), Merck (MRK), and Exxon Mobil (XOM).
No policy change expected in January Fed meeting. Expectations for a rate hike at the Fed meeting concluding on Wednesday are fairly low. 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. Markets are expecting a rate hike at the March Fed meeting, however, with a Fed fund futures implied probability of 89%. The Fed is forecasting three rate hikes in 2018. Also, the January meeting will be the last meeting for current Fed Chair Janet Yellen. Inflation and labor market data points will also be released this week. Core PCE will be released on Monday, with a consensus expectation figure of 1.5% y/y. In the jobs report on Friday, the unemployment rate and average hourly earnings are expected to remain stable at 4.1% and 2.5% y/y, respectively. Non-farm payrolls are expected to increase by 180k.
U.S. policy outlook in focus this week. Investors will be looking for additional clues on Trump administration policies this week. Key items include President Trump’s State of the Union Address on Tuesday and the conclusion of NAFTA talks, as well as possible signs of immigration legislation that could help lead to a longer-term budget deal.
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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.
 Bloomberg, MSCI ACWI (All Country World Index) returns 22Jan2018 – 26Jan2018.
 Bloomberg, MSCI Emerging Market Equities Index returns 22Jan2018 – 26Jan2018.
 Bloomberg, MSCI World ex-U.S. IMI Index returns 22Jan2018 – 26Jan2018.
 Bloomberg, MSCI U.S. Equities IMI Index returns 22Jan2018 – 26Jan2018.
 Bloomberg, MSCI Emerging Market Equities Index 02Jan2018 – 26Jan2018.
 Butters, J. (2018). Double-Digit Earnings Growth, High Profit Margin Projected for S&P500 in 2018. Factset: Insight. Retrieved Jan 26, 2018, from https://insight.factset.com/double-digit-earnings-growth-high-profit-margin-projected-for-sp-500-in-2018.
 MarketWatch. U.S. Dollar Index (DXY) returns 22Jan2018 – 26Jan2018.
 IHS Markit, Purchasing Managers Indices for US, Japan, Germany & Europe 26Jan2018. Retrieved Jan 26, 2018 from https://www.markiteconomics.com.
 Source: CME Group, 30-Day Fed Fund Futures Index 26Jan2018.
 Investing.com. U.S. Core PCE Price Index YOY. Retrieved Jan 26, 2018 from https://www.investing.com/economic-calendar/core-pce-price-index-905.
 Payne, D. (2018) Job Growth Becoming More Sustainable. Kiplinger. Retrieved Jan 26, 2018 from https://www.kiplinger.com/article/business/T019-C000-S010-unemployment-rate-forecast.html.