Weekly Review Brief - March 4, 2019

Posted by FlexShares on Mar 4, 2019 1:16:58 PM

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U.S. trade representative Robert Lighthizer explains that U.S.-China trade talks have been progressing well, but there is still work to be done before an agreement is reached. Find out more in this edition of “The Week in Review.”

Last Week Review

Markets look through geopolitical risks for modest weekly gain. Despite geopolitical developments including a U.S.-North Korea nuclear summit that was cut short and rising military tensions between India and Pakistan, global equities finished last week up 0.4%1. Non-U.S. developed markets (0.6%) led all major equity regions, while emerging markets trailed (-0.5%). U.S. equities gained 0.5% last week2 and remain a key driver of the 11.4% global equity performance year-to-date3

Powell reiterates Fed’s patient approach in Congress testimony. In his testimony before the U.S. Senate, Federal Reserve Chairman Jerome Powell reinforced the patient approach the central bank would maintain in consideration of further interest rate hikes. The Fed’s policy outlook will depend on the outcome of its risk cases which include slowing growth in Europe, U.S.-China trade developments and how Brexit unfolds. Powell believes economic data in the U.S. remains strong but will review how the Fed targets inflation as the year progresses. Core inflation has stayed below the Fed’s 2% target for much of the past ten years, including December’s core personal consumption expenditure reading of 1.9% year-over-year (y/y)4.

Sequence of votes scheduled in Brexit process. U.K. Prime Minister Theresa May scheduled three votes from March 12-14. On March 12, members of parliament (MPs) will vote on the renegotiated Brexit withdrawal agreement. If this vote is rejected, MPs will vote on whether the U.K. will exit the European Union (EU) without an agreement. If that is also rejected, the final vote will be held on March 14 to decide if the U.K. will ask for an extension to the March 29 Brexit deadline. A delay of the deadline is the most likely scenario, but any extension must also be approved by the EU.

U.S. trade official Lighthizer notes progress in U.S.-China trade talks. In testimony to Congress last week, U.S. trade representative Robert Lighthizer explained that U.S.-China trade talks have been progressing well, but there is still work to be done before an agreement is reached. He also noted that the U.S. is no longer threatening to raise tariffs on China goods from 10% to 25% for now5. Also related to China, MSCI announced a three-step plan to increase the weightings of mainland China equities in its emerging markets index, with the next move coming in May.

4Q earnings season nears completion. In Q4 2018, companies performed well despite much lower expectations compared to previous quarters. Without as much benefit from the changes to the tax code in Q4, 485 S&P 500 companies (97%) have reported earnings with aggregate year-over-year earnings growth of 12.0% and revenue growth of 6.2% for the fourth quarter in 20186.

This Week Preview

Jobs report in the spotlight. Economist surveys predict that February’s jobs added figure of +185k will come in well under January’s 304k jobs added. Wage inflation, measured by average hourly earnings, has increased by 3.3% y/y in three of the last four months and is expected to continue close to that level at 3.2% y/y in February. The unemployment rate that hit 4.0% in January is expected to tick back down to 3.9% in February. The Fed will continue to closely monitor economic data in the U.S. and globally as it makes any adjustments to monetary policy down the road. Global data in focus this week include China’s import and export data as well as headline inflation. Surveys show an improvement to imports, while exports are likely to drop from January’s 9.1% y/y growth. China’s headline Consumer Price Index has been dropping since its recent October peak and is expected to come in at 1.5% y/y.

European Central Bank likely to remain accommodative. Slower economic growth metrics and muted inflation, have investors expecting European Central Bank (ECB) members to continue their accommodative monetary policy stance. Prior to the late-2018 financial market weakness, ECB President Mario Draghi, planned to move interest rates higher in the second half of 2019. Now the ECB has joined many other global central banks taking a pause, keeping an eye on risks to global growth. Investors will listen for any changes to monetary policy as Draghi said he will not hesitate to add stimulus if necessary.

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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) MSCI ACWI (All Country World Index) returns 25Feb2019 – 01Mar2019.

2) Bloomberg, MSCI World ex-U.S. IMI Index returns 25Feb2019 – 01Mar2019. Bloomberg, MSCI Emerging Market Equities Index returns 25Feb2019 – 01Mar2019. MSCI U.S. Equities IMI Index returns 25Feb2019 – 01Mar2019.

3) MSCI ACWI (All Country World Index) returns 02Jan2019 – 01Mar2019.

4) 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.

5) CNN Business. Borak, Donna. US ditches China tariff hike ‘until further notice’. Retrieved on 28Feb2019 from https://cnn.com/2019/02/28/business/us-china-trade-war-tariffs/index.html

6) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 01Mar2019 from http://lipperalpha.financial.thomsonreuters.com/2019/02/sp-500-17q1-earnings-dashboard/.

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

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