Weekly Review Brief - July 15, 2019

Posted by FlexShares on Jul 15, 2019 1:57:09 PM

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Amazon plans to retrain a third of U.S. employees. Find out more in this edition of “The Week in Review.”

Last Week Review

U.S. equities reach new highs while international equities struggle. Expectations for up to 50 basis points of Federal Reserve easing, sent U.S. equities 0.7% higher as the S&P 500 hit 3000 for the first time1. Non-U.S. developed (-0.5%) and emerging market equities (-0.7%) declined, leading to a modest weekly gain for global equities2. With a 21.6% year-to-date return, U.S. equities hold about a 7% and 11% advantage over their non-U.S. developed and emerging market counterparts3. In fixed income markets, some steepness was added to the yield curve as the 2-year dropped 1 basis point, while the 10-year Treasury yield jumped 9 basis points last week to 2.12%4.

Fed Chairman Powell makes the case for a cut. Fed Chairman Jerome Powell set the stage in testimony to Congress last week for a likely rate cut in late July. Despite reduced U.S.-China trade tensions following the G20 summit and a June jobs report that recovered well from a poor showing in May, Powell is sticking with the message from the June Fed meeting minutes5. The Fed would look to cut rates to support the economic expansion given uncertainties and downside risks facing the U.S. economy. Investors are now fully expecting at least a 25 basis point rate cut as Fed funds futures have been pricing this in at 100% since the June meeting. Markets are assigning a 20% probability to a 50 basis point rate cut as Powell did not push back against that possibility when questioned in his testimony6.

U.S. inflation surprises to the upside. Core Consumer Price Index (CPI) shifted higher than May and above economist surveys to 2.1% year-over-year (y/y) while headline CPI moved down to 1.6% y/y. The Producer Price Index at core and headline levels surpassed surveys as well. The Fed stood firmly against cutting rates to support inflation for most of 2019 as it only recently began to acknowledge persistently low inflation. June’s inflation readings are unlikely to sway the Fed away from a seemingly predetermined July cut decision. In other economic data, China posted trade data which showed imports deteriorating 7.3% y/y and exports declining 1.3% y/y.

Amazon plans to retrain a third of U.S. employees. In the age of automation, Amazon is spending $700 million by 2025 to retrain 100,000 employees for higher-skilled positions. Scrutiny on large technology companies is likely to escalate as the 2020 elections approach7. In the latest blow to large tech companies, France voted on Thursday to tax digital companies with revenues above $845 million globally and above $30 million in France. U.S. President Donald Trump may respond with retaliatory tariffs following an investigation as he believes U.S. companies are unfairly targeted8.

This Week Preview

2Q earnings season starts with banks. Estimates show U.S. equities experiencing a 2.6% decline to earnings growth in the second quarter. After a small decline in the first quarter, correct estimates would make two negative quarters in a row, though a modest surprise to the upside could keep the aggregate figure in positive territory. Earnings declines in several large companies and weakness in the technology sector are expected to weigh on the aggregate earnings figure. Companies in the financials sector kick off earnings season with Citigroup (C), JPMorgan (JPM), Wells Fargo (WFC), Bank of America (BAC) and American Express (AXP). Other notable companies reporting this week include Johnson & Johnson (JNJ), Union Pacific (UNP), UnitedHealth Group (UNH), Schlumberger (SLB) and Microsoft (MSFT)9.

Global inflation readings expected to remain in-line with prior levels. Global inflation readings have been muted for quite some time and are expected to remain low as the U.K., Europe and Japan report core and headline CPI figures this week. The U.K. is the only major region within the last 12 months that has surpassed most central banks’ 2% target. Global central banks in this time of uncertainty around trade are more focused on supporting economic growth than stimulating inflation. The European Central Bank and Bank of Japan respective policy rates of 0% and -0.1% leave less room to move through rate cuts while the Bank of England can cut by 0.75% if necessary.

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.

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End Notes

    1. 1. Bloomberg, MSCI U.S. Equities IMI Index 08Jul2019 – 12Jul2019.
    2. 2. MSCI World ex-U.S. IMI Index returns 08Jul2019 – 12Jul2019. MSCI Emerging Market Equities Index returns 08Jul2019 – 12Jul2019. Bloomberg, MSCI World Index returns 08Jul2019 – 12Jul2019.
    3. 3. Bloomberg, MSCI World Index returns 02Jan2019 – 12Jul2019. MSCI World ex-U.S. IMI Index returns 02Jan2019 – 12Jul2019. MSCI Emerging Market Equities Index returns 02Jan2019 – 12Jul2019.
    4. 4. Bloomberg, 2-Year Treasury Rate 08Jul2019 – 12Jul2019. Bloomberg 10-Year Treasury Rate 08Jul2019 – 12Jul2019.
    5. 5. Federal Open Market Committee. (June 19, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 28Jun2019 from https://federalreserve.gov/mediacenter/files/FOMCpresconf20190619.pdf
    6. 6. Bloomberg, Fed Funds Futures Index 12Jul2019. 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. 7. Valinsky, Jordan. CNN. Amazon plans to retrain 100,000 employees. Retrieved on 15Jul2019 from https://cnn.com/2019/07/11/tech/amazon-retraining-workers/index.html.
    8. 8. Davison, Laura. Leonard, Jenny. Bloomberg. U.S. Investigates France’s Plan to Impose a Tax on Tech Giants. Retrieved on 15Jul2019 from https://bloomberg.com/news/articles/2019-07-10/u-s-opens-investigation-into-french-plan-for-tax-on-tech-giants.
    9. 9. Thomson Retuers. S&P 500 Earnings Dashboard. Retrieve 15Jul2019 from http://financial.thomsonreuters.com

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