Weekly Review Brief - November 18, 2019

Posted by FlexShares on Nov 18, 2019 1:03:09 PM

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Walmart earnings reflect constructive U.S. consumer backdrop. Find out more in this edition of “The Week in Review.”

Last Week Review

Global equities manage modest gain after relatively quiet week. Global equities increased 0.4% last week, with a 0.9% gain in the U.S. outpacing weaker returns in non-U.S. developed markets (0.2%) and emerging markets (-1.4%)1. U.S. equities were quite flat all of last week aside from Friday, while non-U.S. equities were in negative territory most of the week2. Global equities have now posted gains for six consecutive weeks and are currently up 22.5% year-to-date3. Across the major equity regions, the U.S. leads at 26.3% compared to 19.5% in non-U.S. developed markets and 10.8% in emerging markets4. The yield curve modestly flattened last week, with the 10-year Treasury yield (1.83%) now 22 (0.22%) basis points above the 2-year yield (1.61%)5.

Limited new developments on trade and the Fed. Though both a key part of the investor narrative in 2019, developments last week related to trade and the Federal Reserve were relatively modest. China expressed some concern on agreeing to a fixed amount of purchases of U.S. agricultural goods, while U.S. comments were more optimistic that a finalized phase one trade deal is near6. With regards to the Fed, Chairman Jerome Powell confirmed that Fed policy is on hold for now, but denied that the central bank is on hold for all of 2020, since the Fed would look to step in if the growth outlook deteriorates. Powell’s message was interpreted as slightly more dovish than his comments at the October Fed meeting. Recent stabilization in the U.S. growth outlook has led to a pullback in investor expectations for a December Fed rate cut, currently at about 4% – down from roughly 30% in late October7.

Growth data mixed while inflation mostly unchanged. Third quarter GDP figures for Europe and Germany surprised slightly to the upside. The small surprises were notable given investor concerns around the near-term European growth outlook. On the contrary, economic data in China disappointed last week. Industrial production, fixed asset investment and retail sales all fell short of their respective prior levels and consensus expectations. However, China’s growth outlook heading into 2020 should improve markedly if a trade deal is signed. Looking at inflation, readings in the U.S., the U.K., Europe and Germany all stayed close to prior levels. U.S. Consumer Price Index (CPI) ticked up to 1.8% year-over-year (y/y), while core CPI ticked down to 2.3% y/y.   

Walmart earnings reflect constructive U.S. consumer backdrop. Walmart (WMT) is often viewed as a U.S. consumer bellwether given its large presence across the U.S. The company’s recent earnings release included solid overall sales, higher profit forecasts and strength in online sales. The results overall were consistent with a healthy U.S. consumer environment heading into the holiday retail season8.

This Week Preview

Third quarter earnings season near completion. Third quarter earnings season remains very close to the finish line with less than 10% of S&P 500 companies yet to report. A bulk of those companies remaining are part of the consumer discretionary sector, with earnings releases this week including Home Depot (HD) and Target (TGT)9.

Improvement expected in flash manufacturing PMI data. Investors will monitor flash Purchasing Managers’ Index (PMI) readings closely for signs of a rebound, particularly in the manufacturing sector. In the U.S., the manufacturing PMI has improved in the past two months and economists expect this trend to continue this month. After falling into contractionary territory (below 50) in early 2019, Europe’s manufacturing PMI appears to have reached a bottom in September. After a modest gain in October, surveys expect another increase in November. Consensus expectations across the major developed regions for services PMI readings are still above the 50 dividing line and generally show modest gains across the regions over the prior month.

U.S. deadline for waiver on Huawei sanctions approaches. This Monday marks a deadline the U.S. has set for the waiver it granted on restrictions that prevent Chinese telecom company Huawei from doing business with U.S. companies. The U.S. may extend the waiver but appears unlikely to offer significant concessions on Huawei as part of a finalized phase one U.S.-China trade deal10.

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 11Nov2019 – 15Nov2019. Bloomberg, MSCI U.S. Equities IMI Index 11Nov2019 – 15Nov2019. MSCI World ex-U.S. IMI Index returns 11Nov2019 – 15Nov2019. MSCI Emerging Market Equities Index returns 11Nov2019 – 15Nov2019.
  2. 2. Bloomberg, MSCI U.S. Equities IMI Index 11Nov2019 – 15Nov2019. MSCI World ex-U.S. IMI Index returns 11Nov2019 – 15Nov2019.
  3. 3. Bloomberg, MSCI World Index returns 02Jan2019 – 15Nov2019.
  4. 4. Bloomberg, MSCI U.S. Equities IMI Index 11Nov2019 – 15Nov2019. MSCI World ex-U.S. IMI Index returns 11Nov2019 – 15Nov2019. MSCI Emerging Market Equities Index returns 11Nov2019 – 15Nov2019.
  5. 5. Bloomberg, 10-Year Treasury Rate 11Nov2019 – 15Nov2019. Bloomberg, 2-Year Treasury Rate 11Nov2019 – 15Nov2019.
  6. 6. Li, Yun. CNBC. US-China trade talks are getting held up because of disagreements on a number of issues. Retrieved on 18Nov2019 from https://www.cnbc.com/2019/11/13/us-china-trade-talks-hit-snag-over-agriculture-purchases-other-issues-according-to-report.html
  7. 7. Bloomberg, Fed Funds Futures Index 18Nov2019. 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.
  8. 8. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 11Nov2019 from http://lipperalpha.financial.thomsonreuters.com
  9. 9. Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved on 11Nov2019 from http://lipperalpha.financial.thomsonreuters.com
  10. 10. Behsudi, Adam. Politico. U.S. likely to extend limited export waiver for Huawei. Retrieved on 18Nov2019 from https://www.politico.com/news/2019/11/14/huawei-trade-waiver-070982

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Tags: Weekly Market Update