Weekly Market Update - Jan 7, 2019

Posted by FlexShares on Jan 7, 2019 5:00:00 PM

.weekly review 01-07-19

Blaming low projections of iPhone sales in China, Apple lowered its revenue forecasts for the first time in 16 years. Apple CEO Tim Cook explained that the magnitude of the slowdown in China would be greater than what Apple previously expected. Find out more in this edition of “The Week in Review.”

Last Week Review

Fed Chair Powell’s comments provide late week boost. Apple’s revenue forecast and a soft U.S. Purchasing Managers’ Index (PMI) reading, helped lead a sell-off in U.S. equities mid-week before recovering after Federal Reserve Chair Jerome Powell’s comments. He said that there’s no set path for rates in 2019 and the Fed would demonstrate patience as muted inflation would allow it to further digest economic data before making monetary policy decisions. U.S. equities went up 3.5% on Friday to push the year-to-date return into positive territory at 1.2%1. Emerging and non-U.S. developed market equities also experienced rallies late last week, bringing their year-to-date returns to -0.1% and 1.1%, respectively2. In fixed income, the U.S. yield curve inverted between the 2-year and 5-year segments mid-week, while the 10-year yield finished the week at 2.67%3.

Most major asset classes struggled in 2018. The Fed’s rate hike campaign and U.S.-China tensions were a focus for investors in 2018. Back and forth threats and tariffs as well as Fed rate hikes misaligned with expectations led to volatility spikes. With a return of 1.8%, cash was the best performing major asset class of 20184.

Apple cuts revenue forecasts. Blaming low projections of iPhone sales in China, Apple lowered its revenue forecasts for the first time in 16 years. Apple CEO Tim Cook explained that the magnitude of the slowdown in China would be greater than what Apple previously expected. Slowing economic growth in China’s manufacturing sector was demonstrated through December’s manufacturing PMI figure of 49.7. The number had been steadily decreasing throughout the year, but finally entered contractionary (below 50) territory last Tuesday.

Final PMI data worries U.S. investors. Manufacturing Purchasing Managers’ Index (PMI) data revealed moderating growth as manufacturing PMI measured by ISM dropped significantly from 59.3 in November to 54.1 in December . The Apple revenue forecast combined with the soft manufacturing PMI print to push U.S. equities down 2.3% last Thursday5. Elsewhere, Europe experienced a small downtick to 51.4 (previously 51.8) while the UK and Japan pushed higher to 54.2 and 52.6, respectively. With the exception of China, all of the major regions remain in expansionary territory.

Labor market surprises to the upside. Friday’s jobs added figure of 312k brings the 2018 total to an average of 220k monthly jobs added. Wage inflation ticked up to 3.2% year-over-year (y/y), above consensus and last month’s reading. After staying between 3.7% and 3.8% in the last three months, the unemployment rate moved up to 3.9% which is likely a result of the increased labor force participation rate.

This Week Preview

Fed Chair Powell to speak following meeting minutes release. Markets will closely follow Powell’s comments after December’s Fed meeting minutes are released on Wednesday. The Fed forecasted two rate hikes in 2019 after moving the Fed Funds rate into the 2.25% - 2.5% channel leaving markets dissatisfied. At odds with the Fed’s projection, markets now give about a 67% probability of rates staying put for 20196.

Soft inflation data expected to finish the year. Friday’s U.S. Consumer Price Index (CPI) and core CPI readings are expected to come in below November’s headline inflation figures at 1.9% y/y and in line with the core reading at 2.2% y/y, respectively7. Both figures have been decreasing since mid-2018 and are moving back closer to early-2018 levels. Falling oil prices that ended 2018 down 25% contributed to the decrease in headline levels. Housing, the largest CPI component, was a main contributor to slowing inflation that has helped push headline and core levels lower. China will release inflation data on Wednesday with no change expected from the prior reading. Money supply levels and foreign reserves data from China will also be closely followed by investors.

U.S. officials travel to China to discuss trade. As economic growth slows across the U.S. and China, investors will look for progress toward a trade deal. The U.S. still has the goal to prevent China from having unfair advantages due to intellectual property theft when working in China.

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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, MSCI U.S. Equities IMI Index returns 02Jan2018 – 04Jan2019.

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 02Jan2018 – 04Jan2019.

3)Bloomberg, Yield curve as of 31Dec2018 and is constructed by plotting a sessions final yields for various maturities including 1-month, 3-month, 6-month, 1-year, 2-year, 3-year, 5-year, 7-year, 10-year, 20-year and 30-year maturities. In this example, we are comparing the yield as of a certain date between the 2-year, 5 year and the 10-year maturing instruments.

4) Bloomberg Barclays (BBC) 1-3 Month US Treasury Index 02Jan2018 – 31Dec2018

5) Bloomberg, MSCI U.S. Equities IMI Index return 03Jan2019.

6) Bloomberg, Fed Funds Futures Index 04Jan2019. 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.

7) Headline inflation is the raw inflation figure as reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics. The CPI calculates the cost to purchase a fixed basket of goods, as a way of determining how much inflation is occurring in the broad economy.

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