Weekly Review Brief - March 18, 2019

Posted by FlexShares on Mar 18, 2019 3:03:00 PM

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UK parliament finally voted to delay the March 29 Brexit deadline. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities march higher. Global equities moved 2.8% higher last week with similar returns across the U.S. (2.8%), non-U.S. developed markets (2.7%) and emerging markets (2.6%)1. The 12.2% year-to-date global equity return has benefitted from the 13.8% return in U.S. equities in addition to solid returns in non-U.S. developed markets (11.1%) and emerging markets (9.6%)2. The U.S. yield curve flattened slightly last week with the 10-year Treasury yield (2.59%) sitting 15 basis points above the 2-year Treasury yield (2.44%)3.

UK parliament votes to delay March 29 Brexit deadline. After rejecting UK Prime Minister Theresa May’s Brexit deal on Tuesday, and voting against leaving the European Union (EU) without a deal, UK parliament finally voted to delay the March 29 Brexit deadline. The sequence of voting will lead to another vote on May’s withdrawal plan next week where she will leverage the possibility of a long delay against anti-EU lawmakers in order to persuade them to accept the deal. In a week with much attention on Brexit, the sterling rose sharply on the first Brexit vote and declined slightly following the vote for a delayed deadline, leaving it up on the U.S. dollar for the week.

U.S. inflation continues descent from mid-2018 high. After peaking in July 2018, headline and core Consumer Price Index (CPI) levels have steadily declined. Both readings surprised to the downside in February at 1.5% year-over-year (y/y) and 2.1% y/y, respectively. Diving into the components within core CPI, all areas saw price declines except shelter. Economists suggest that weak financial markets at the end of 2018 and tighter financial conditions due to the government shutdown could have led to a decrease in high-end consumption which filtered into many inflation components.

U.S.-China trade meeting pushed into April. In addition to reports that U.S. President Donald Trump and China President Xi Jinping would not meet to discuss trade until April, U.S. chief trade representative Robert Lighthizer said that major hurdles remain before a trade agreement is reached. Investors will continue to monitor economic data in China to gauge the effectiveness of China’s recent stimulus efforts, such as tax cuts. The most recent data sent mixed signals with industrial production at a 17-year low in terms of growth, while retails sales were in-line with expectations4.

737 Max crash leads to 10% weekly decline in Boeing’s stock. After the second crash in five months, global authorities have banned flights of the 737 Max. The planes will remain grounded until Boeing (BA) fixes the software problem that may have led to the crashes. This could take a few weeks, adding to the costs Boeing will likely have to pay for legal settlements, airline delays and replacement planes5.

This Week Preview

Investors look to Fed for rate path and balance sheet answers. After the Federal Reserve pivoted from gradual interest rate increases in 2018 to a pause in January’s meeting, investors will look to see how the Fed has digested the most recent economic data in Wednesday’s meeting. The median Fed funds rate forecast by Fed officials in December indicated two rate hikes by the end of 2019, though this is likely to be moved lower in the March update. Alternatively, markets see little chance of a hike in 2019 and are actually expecting about a 32% probability of a rate cut by year-end. In addition to the rate path, investors are looking for more detail on the Fed’s plan for its balance sheet. The Bank of England will also meet on Thursday, where tame inflation and Brexit uncertainty are likely to keep the current policy rate at 0.75%6.

Flash PMIs expected to highlight healthy service sector. Flash Purchasing Managers’ Index (PMI) readings will be released on Friday. Recent manufacturing data has dropped under 50 in some regions, which is the dividing line between an expansionary and contractionary environment. Europe and Germany are expecting small improvements but still likely remaining below 50. The U.S., the only major region in expansionary territory, is expected to increase to 53.6. In addition, service sectors across the globe remain healthy. Both the U.S. and Europe flash services PMIs should remain above 50. Additional economic data this week includes inflation releases from the UK and Japan, which are both expected to remain close to prior levels.

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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 ACWI (All Country World Index) returns 11Mar2019 – 15Mar2019. Bloomberg, MSCI U.S. Equities IMI Index returns 11Mar2019 – 15Mar2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 11Mar2019 – 15Mar2019. Bloomberg, MSCI Emerging Market Equities Index returns 11Mar2019 – 15Mar2019.

2) Bloomberg, MSCI ACWI (All Country World Index) returns 02Jan2019 – 15Mar2019. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2019– 15Mar2019. Bloomberg, MSCI World ex-U.S. IMI Index returns 02Jan2019 – 15Mar2019. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2019 – 15Mar2019.

3) Bloomberg, 2-Year nominal U.S. Treasury rates using data available as of 11Mar2019 – 15Mar2019. Bloomberg, 10-Year nominal U.S. Treasury rates using data available as of 11Mar2019 – 15Mar2019.

4) Yao, Kevin. Qiu, Stella. Reuters. China Industrial Output Growth Falls to 17-year low, more support steps expected. Retrieved on 15Mar2019 from https://reuters.com/article/china-economy-activity/china-industrial-output-growth-falls-to-17-year-low-more-support-steps-expected-idINKCN1QV0B6

5) Josephs, Leslie & Breuniger, Kevin. CNBC. US grounds Boeing 737 Max planes, citing links between 2 fatal crashes. Retrieved on 15Mar2019 from https://cnbc.com/2019/03/13/boeing-shares-fall-after-report-says-us-expected-to-ground-737-max-fleet.html

6) Federal Open Market Committee. (January 30, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 01Mar2019 from https://www.federalreserve.gov/mediacenter/files/FOMCpresconf20190130.pdf

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.

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