U.S. equities still in the lead, continued trade barbs and will employment continue on full blast. Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities see some relief late in the week. Global equities experienced another bumpy week as trade concerns led to negative returns across each major region.1 Emerging market equities dropped 1.5%,2 while U.S. and non-U.S. developed market equities declined 1.4% and 0.9%, respectively.3 Through the first half of calendar year 2018, global equities are mostly unchanged (-0.1%),4 with U.S. equities the leading major region at 3.3%.5 Emerging market equities have declined 6.7% year-to-date,6 while non-U.S. developed markets are down 2.2%.7 Across other asset classes, investment grade fixed income (-1.6%) and high yield fixed income (0.2%) have seen relatively quiet returns in 2018 so far.8 Returns by natural resources (3.7%) lead the real assets category.9
Inflation data remains contained globally. Inflation data released last week across the U.S. and Europe was close to prior readings and consensus expectations. The Federal Reserve’s (Fed) preferred inflation metric of Personal Consumption Expenditures (PCE) Core came in at 2.0% year-over-year (y/y), a bit higher than consensus expectations (1.9% y/y) and the prior reading (1.8% y/y). Markets, utilizing the Fed Funds Futures Index as a proxy, appear to be expecting about a 77% probability of a rate hike in the September meeting and between three and four hikes overall in calendar year 2018.10 In Europe, headline and core inflation data were both in-line with consensus expectations at 2.0% y/y and 1.0% y/y, respectively.
U.S. and China continue to exchange trade barbs. In a speech to corporate executives, China President Xi Jinping explained that China will fight back to trade measures taken by the U.S., meaning that U.S. companies operating in China could face additional regulatory challenges. President Donald Trump indicated that the U.S. would not be forming a new initiative to limit Chinese investment in the U.S. but would instead seek to tighten the current program already in place. In addition, Harley-Davidson (HOG) announced it would shift some production outside the U.S. in response to European Union (EU) tariffs, a high profile example of financial market implications as tariff measures continue to go into effect.
EU leaders reach agreement on migration policy. EU leaders met last week to discuss key issues including migration and economic reform. Despite tensions early on in the summit, the leaders agreed on a system to process migrants seeking asylum. The deal comes at a key time for Germany Chancellor Angela Merkel, who is under intense pressure from her party’s coalition partners to address migration concerns. Markets responded positively to the deal, though some details remain to be seen.
This Week Preview
U.S. trade measures continue to go into effect. Starting this Friday, U.S. tariffs on $34 billion worth of imports from China will go into effect. The possibility also remains that the U.S. will implement additional tariffs on $200 billion of goods from China and automobile exports from the EU in the future. We believe investors will continue to look for signs that trade is impacting corporate earnings and will be closely following company commentary on trade in earnings calls that will commence in a few weeks.
Consensus expectations call for another solid U.S. jobs report. Following the mid-week market holiday in the U.S., labor market data will be reported on Friday and we believe with an expected non-farm payrolls added figure of 195k which is close to the average level observed over the last six months (202k). Markets will be closely watching the wage growth figure, which is expected to tick up to 2.8% y/y from the prior level of 2.7% y/y. Finally, the unemployment rate is expected to remain unchanged at 3.8%.
Composite PMI data expected to remain constructive overall. Final Purchasing Managers’ Index (PMI) data will be released this week. Readings across the U.S. and Europe are expected to remain relatively close to flash readings released earlier in the month, though investors will be looking to see if trade uncertainties weigh on the data. All PMI data points across the major developed markets are expected to remain comfortably in expansionary territory (above 50).
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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.
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.
1. Bloomberg, MSCI ACWI (All Country World Index) returns 25Jun2018 – 29Jun2018.
2. Bloomberg, MSCI Emerging Market Equities Index returns 25Jun2018 – 29Jun2018.
3. Bloomberg, MSCI U.S. Equities IMI Index and MSCI World ex-U.S. IMI Index returns 25Jun2018 – 29Jun2018.
4. Bloomberg, MSCI ACWI (All Country World Index) returns 02Jan2018 – 29Jun2018.
5. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 29Jun2018.
6. Bloomberg, MSCI Emerging Market Equities Index 02Jan2018 – 29Jun2018.
7. Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2018 – 29Jun2018.
8. Bloomberg, Bloomberg Barclays Aggregate Index and the Bloomberg Barclays High Yield 2% Capped Index returns 02Jan2018 – 29Jun2018.
9. Bloomberg, S&P Global Natural Resources Index return 02Jan2018 – 29Jun2018.
10. Bloomberg, Fed Funds Futures Index 29Jun2018. 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.