Global equities declined last week after less support from recent market-friendly trends, including central banks hitting the pause button on further rate hikes. Find out more in this edition of “The Week in Review.”
Last Week Review
Markets fall after three weeks of gains. Global equities declined 2.1% last week1 after less support from recent market-friendly trends, including central banks hitting the pause button on further rate hikes, temporary U.S.-China trade relief and solid earnings growth. Of the major equity regions, the U.S. (-2.4%) declined the most, while non-U.S. developed markets and emerging markets also struggled at -2.0% and -1.9%, respectively2. In 2019 so far, global equities have increased by 9.1%3. Reviewing fixed income markets, high yield credit spreads widened 28 basis points to 4.04%4, while investment grade spreads moved up 3 basis points to 1.16%5. The 10-year U.S. Treasury yield dropped 12 basis points to end last week at 2.63%6.
European Central Bank downgrades growth forecast in dovish tilt. Policymakers downgraded projections for 2019 economic growth from 1.7% to 1.1%. Inflation is expected to remain below the central bank’s 2% target until 20217. The growth and inflation outlook led ECB officials to delay guidance for the first interest rate hike through the end of 2019, after previously announcing that the first hike would occur no earlier than summer 2019. Additionally, the ECB will provide cheap loans to banks called Targeted Longer-Term Refinancing Operations (TLTROs) for the first time in three years in order to stimulate lending7. These monetary policy moves come only a few months after the ECB ended it’s €2.6 trillion asset purchase program8.
Jobs added figure well short of consensus in weak jobs report. In the February labor market report, the U.S. economy added 20k jobs, which was lower than both consensus (180k) and the prior month (311k). Despite the soft jobs reading, the trailing-three month average remains solid at 186k and recent U.S. economic data has held up well, such as last week’s ISM Non-Manufacturing Index (59.7). Average hourly earnings moved higher from 3.2% year-over-year (y/y) in January to 3.4% y/y in February. Historically, wage inflation has had a relatively low correlation to core inflation until wage inflation exceeds 4%. Finally, the unemployment rate moved lower to 3.8%.
Soft China trade data likely impacted by timing of holiday. Significantly below consensus, China import and export data was likely affected by the Lunar New Year holiday. China’s equities declined almost 5% last Friday, but remain up about 20% in local currency terms year-to-date9. In addition, a Brookings Institute study showed that mainland China has overestimated growth figures by about 2% annually over each of the last 9 years10. Though skepticism on the accuracy of China’s official data is nothing new, the study brings more focus to the data at a time of softening growth in China.
This Week Preview
UK set to hold Brexit votes with deadline less than three weeks away. UK Prime Minister Theresa May will hold a sequence of votes from March 12-March 14. The first vote held on Tuesday will have parliament members (MPs) decide on the renegotiated Brexit agreement. If this vote is rejected, voting will continue on Wednesday to determine whether or not the UK will break off from the European Union (EU) without an agreement. The most likely scenario is that the first two votes are rejected and MPs will vote on Thursday to delay the March 29 Brexit deadline. Following the vote on a Brexit deadline extension, the EU must hold its own vote to allow or disallow an extension.
U.S. inflation expected to stay capped. This Tuesday’s U.S. inflation data will likely receive some extra attention given the upward move in wage growth in last Friday’s jobs report. Low energy prices should continue to keep a lid on the headline Consumer Price Index (CPI) level which has an expected reading of 1.6% y/y. Core CPI, which excludes food and energy, is expected to grow at 2.2% y/y for the fourth consecutive month. Other economic data under watchful investors’ eyes include sentiment indicators on consumer confidence and small business optimism.
Bank of Japan may consider more stimulus. The Bank of Japan meets this week where it must assess the economic outlook as well as potential impacts from Japan’s planned sales tax increase in the second half of 2019. In the face of slowing growth, the central bank could consider further stimulus measures.
Click here to view the full report.
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.
1) Bloomberg, MSCI ACWI (All Country World Index) returns 04Mar2019 – 08Mar2019.
2) Bloomberg, MSCI U.S. Equities IMI Index returns 04Mar2019 – 08Mar2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 04Mar2019 – 08Mar2019. Bloomberg, MSCI Emerging Market Equities Index returns 04Mar2019 – 08Mar2019.
3) MSCI ACWI (All Country World Index) returns 02Jan2019 – 08Mar2019.
4) In this analysis we are making a comparison of the difference in yield between one debt security and another debt security with the same maturity but of lesser quality using the Bloomberg Barclays Credit Index using data available as of 04Mar2019 – 08Mar2019.
5) In this analysis we are making a comparison of the difference in yield between one debt security and another debt security with the same maturity but of lesser quality using the Bloomberg Barclays Aggregate Investment Grade Index using data available as of 04Mar2019 – 08Mar2019.
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.