Weekly Review Brief - November 04, 2019

Posted by FlexShares on Nov 4, 2019, 10:51:57 AM

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Federal Reserve cuts rates for the third time since July.  Find out more in this edition of “The Week in Review.”

Last Week Review

Fourth consecutive week of gains for global equities. Global equities gained 1.3% last week, leaving the asset class up 20.9% year-to-date with two months left in 20191. The better-than-expected U.S. jobs report helped boost equities late last week, while U.S.-China trade developments were more neutral as the U.S. and China appear to be slowly moving towards finalizing the details of a phase one agreement2.

Federal Reserve cuts rates for the third time since July. The Fed followed market expectations cutting interest rates by 25 basis points to the new 1.5% - 1.75% target range3. Following the rate cut, investors focused on the committee’s language for future policy decisions. Rather than “act as appropriate to sustain the expansion,” Fed officials will assess incoming economic data to determine the future rate path. The Fed is on-hold but may step in with further easing in the event of further deterioration in U.S. economic data. After Wednesday’s meeting, Fed funds futures indicated a 22% probability of a December Fed rate cut4. Later last week, the yield curve flattened somewhat, with the 10-year Treasury yield now 16 basis points above the 2-year yield5.

Brexit deadline extended to January 31 following December U.K. election.  As the prospect of pushing through a Brexit deal by October 31 fleeted, U.K. Prime Minister Boris Johnson accepted a three-month extension to January 31. The extension removes immediate risk of a no-deal Brexit and shifts investor attention to the U.K. general election on December 12. The election introduces uncertainty with a number of possible outcomes especially given recent volatility in polling data. A decisive Conservative party victory would have the clearest path forward on Brexit, likely leading to a fast attempt to pass the current withdrawal bill. Brexit implications for other scenarios such as a Labour victory or a hung Parliament are less clear at this point6.

Jobs growth tops expectations despite GM strike. In the October jobs report, the jobs added figure of 128k was above consensus (85k), but below the average level through the first nine months of 2019 (171k). The since-resolved General Motors strike weighed on the October figure. The unemployment rate ticked up to 3.6%, while wage inflation stayed at 3.0% year-over-year (y/y). In other inflation data, core Personal Consumption Expenditures still sits below the Fed’s 2% target at 1.7% y/y.

Health care earnings results lead the way. In third quarter earnings season, 72% of S&P 500 companies have posted results with aggregate earnings growth of -1% year-over-year (y/y) and sales growth of 3.0% y/y. At the sector level, the health care sector has demonstrated the strongest results across sales and earnings growth. In total, both sales and earnings growth for the S&P 500 are ahead of consensus expectations7.

This Week Preview

Earnings season enters final stretch. The Walt Disney Co. (DIS) is one of the more notable names releasing earnings out of the communication services sector on Thursday. Investors will look for more information related to its new streaming service as competition escalates between Disney, Netflix, Amazon Prime, HBO and others. The majority of the companies left to release earnings in the third quarter will come from the consumer discretionary, technology and health care sectors8.

Little improvement expected in China trade data. In economic data releases this week, a modest rebound is expected in Chinese import data, while export data is expected to drop modestly. Also, inflation in China is expected to move somewhat higher from the prior level. Investors will continue to look for more information out of the U.S. and China for developments related to trade. Both sides are anticipating a completed mini-deal before year-end involving agricultural purchases from China and a delay of planned U.S. tariffs against China. China’s imports and exports have fallen compared to last year due to trade tensions, but a signed mini-deal with the U.S. before year-end has the possibility of improving China’s growth outlook heading into 20209.

No change in policy expected at BOE meeting. Monetary policy will likely remain unchanged following Thursday’s Bank of England (BOE) meeting. BOE officials’ economic forecasts will likely reflect the recently lowered risk of a no-deal Brexit10.

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 World Index returns 28Oct2019 – 01Nov2019. Bloomberg, MSCI World Index returns 02Jan2019 – 01Nov2019.
  2. 2. Ramkumar, Amrith. The Wallstreet Journal. S. Adds 128,000 Jobs in October, Beating Expectations. Retrieved on 04Nov2019 from https://www.wsj.com/livecoverage/october-jobs-report-analysis.
  3. 3. Federal Open Market Committee. (October 30, 2019). Chairman Powell’s Press Conference [Interview transcript]. Retrieved on 04Nov2019 from https://www.federalreserve.gov/monetarypolicy/files/monetary20191030a1.pdf
  4. 4. Bloomberg, Fed Funds Futures Index 01Nov2019. 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.
  5. 5. Bloomberg, 10-Year Treasury Rate 28Octt2019 – 01Nov2019. Bloomberg, 2-Year Treasury Rate 28Oct2019 – 01Nov2019.
  6. 6. Norman, Laurence. Colchester, Max. The Wall Street Journal. EU Extends Brexit Deadline Until Jan. 31. Retrieved on 04Nov2019 from https://wsj.com/articles/eu-extends-brexit-deadline-until-jan-31-11572255175
  7. 7. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 28Oct2019 from http://lipperalpha.financial.thomsonreuters.com
  8. 8. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 28Oct2019 from http://lipperalpha.financial.thomsonreuters.com
  9. 9. Kalish, Ira.Dr. Deloitte. Weekly global economic update. Retrieved on 04Nov2019 from https://deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html.
  10. 10. Reuters. Brexit and Election Will Keep Bank of England Playing Waiting Game. Retrieved on 04Nov2019 from https://www.nytimes.com/reuters/2019/11/01/business/01reuters-britain-boe.html.
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Tags: Weekly Market Update