Global and U.S. equities decline erased most year-to-date gains despite positive corporate earnings, what will be next? Find out more in this edition of “The Week in Review.”
Last Week Review
Global equities approach 10% correction territory. Global equities fell 3.8% in a bumpy week with declines across each major region.1 U.S. equities declined 3.9% last week as ongoing United States-China tensions and Federal Reserve policy restrictive-ness continued to weigh on equities.2 Non-U.S. developed market equities (-4.0%) and emerging market equities (-3.3%) fared no better.3 Despite ongoing solid U.S. economic data and high levels of earnings growth, last week wiped out nearly all of the year-to-date gain in U.S. equities (0.5%), with global equities down 5.4% in 2018.4 Year-to-date returns across the major asset classes are now nearly all below zero – with just U.S. equities (0.5%) and high yield fixed income (0.9%) clinging to positive territory.5
Flash PMI data reveals slowing growth momentum in Europe. Flash manufacturing Purchasing Managers’ Index (PMI) figures released last week showed fading growth momentum in Europe with broad Europe (52.1) and Germany (52.3) both falling about a point below prior levels and the consensus expectations. After hitting a 2018 low in July, Japan has recovered with a reading of 53.1. The U.S. PMI (55.9) has moved higher since August, and is the only major region to sit above its 2018 starting point. Despite slowing momentum in Europe, all regions remain in expansionary territory (above 50). Services PMI data trended in a similar direction as Germany and broad Europe saw larger decreases from the prior month while the U.S. pressed higher.
European Central Bank on track to conclude asset purchases. At last Thursday’s meeting, European Central Bank (ECB) President Mario Draghi noted that the main risk to Europe’s economy involved further escalation of U.S.-China tensions but the central bank has enough stimulus if needed to lessen the impact of a growth slowdown. That said, Draghi remains confident in Europe’s broad-based economic expansion and expects the ECB to end its asset purchase program – currently at €15 billion per month – at the end of 2018.6 Earlier last week, the European Commission rejected Italy’s budget plan which called for a budget deficit above the allowable range. The Italy 10-year government bond yield hit a weekly high of 3.6%, though Draghi expressed confidence that a deal would be reached.7
Robust earnings growth fails to calm equity market jitters. Following a heavy week of earnings reports, 240 S&P 500 companies (48%) have reported results.8 Aggregate earnings growth (23.4%) and revenue growth (8.7%) on a year-over-year (y/y) basis remain ahead of consensus expectations.9 We believe mixed earnings reports from some large technology companies failed to provide support to the major U.S. equity indices.
This Week Preview
Apple and Facebook to report earnings. In addition to these tech behemoths, companies from a wide variety of sectors will report earnings throughout the week. Companies include Berkshire Hathaway (BRK/B), Coca Cola (KO), General Electric (GE), Starbucks (SBUX) and Pfizer (PFE). Chevron (CVX) and Exxon Mobil (XOM) will conclude this week’s earnings reports on Friday.
U.S. jobs report expected to show continued strength. We expect the jobs added figure is to improve over September’s hurricane-dampened figure of 134k to 193k. Our analysis suggests the unemployment rate will remain at about 3.7% and wage inflation as measured by average hourly earnings should to stabilize at approximately 2.8% y/y. In addition, the Federal Reserve’s (the Fed) preferred inflation measure, the core personal consumption expenditures index, will be released on Monday. We expect the measure to remain unchanged at 2.0% y/y, which would be largely in line with levels observed over the last six months and serve as another data point for the Fed to assess as it continues to work towards gradually raising interest rates.
No expectations for monetary policy change at BOJ meeting. The Bank of Japan (BOJ) will conclude its October meeting on Wednesday and we don’t anticipate a change in monetary policy. The increase in consumption tax planned for 2019 along with inflation well below target is likely to keep the BOJ on its current path of keeping policy accommodative over the near-to-medium term.
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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.
1) Bloomberg, MSCI World Index return 15Oct2018 – 19Oct2018.
2) Bloomberg, MSCI U.S. Equities IMI Index returns 22Oct2018 – 26Oct2018.
3) Bloomberg, MSCI World Index returns, Bloomberg, MSCI Emerging Market Equities Index return 22Oct2018 – 26Oct2018.
4) Bloomberg, MSCI U.S. Equities IMI Index returns, Bloomberg, MSCI ex-U.S. Equities IMI Index returns 02Jant2018 – 26Oct2018.
5) Bloomberg, MSCI U.S. Equities IMI Index returns, Bloomberg High Yield return data 02Jan2018 – 26Oct2018.
6) European Central Bank (ECB) Press Release, Monetary Policy Decisions, 25Oct2018.
7) Bloomberg, Generic Italian Government Bond Rate, 10-Year Maturity, 22Oct2018 – 26Oct2018
8) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 26Oct2018 from http://lipperalpha.financial.thomsonreuters.com/2018/10/sp-500-17q1-earnings-dashboard/
9) Thomson Reuters. S&P 500 Earnings Dashboard. Retrieved 26Oct2018 from http://lipperalpha.financial.thomsonreuters.com/2018/10/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.