Emerging market turmoil, US wage growth and is the S&P 500 tech stock heavy? Find out more in this edition of “The Week in Review.”
Last Week Review
Emerging market turmoil pulls global equities lower. A strong dollar1, the prospect of rising U.S. interest rates and country-specific issues have led to struggles in various emerging market currencies over the last few weeks. The Indian rupee reached its lowest level vs the U.S. dollar last Thursday2 and fears of emerging market contagion spread through financial markets. Emerging market equities reflected these fears – dropping 3.0% for the week3 – which leaves the region down 17.9% from January’s peak.4 U.S. and non-U.S. developed market equities both struggled as well with 1.1% and 2.8% weekly declines, respectively.5 Global equities (1.9%) remain in positive territory year-to-date,6 solely supported by U.S. equities (9.3%),7 the only major region with a positive return in 2018 so far.8 In fixed income, the spread between the 10-year and 2-year U.S. Treasury yields remained at about 24 basis points last week.9 Following the above-consensus U.S. wage growth reading last Friday, the 2-year and 10-year U.S. Treasury yields each moved about 7 basis points higher.10
Wage growth reaches 2018 high in otherwise solid jobs report. U.S. labor market data for the month of August included a jobs added figure of 201k, which was roughly in-line with consensus (198k) and an improvement from July’s figure (147k). Wage growth had been stuck between 2.6% and 2.8% year-over-year (y/y) since the end of last year but this month’s reading finally broke out of the range with a 2.9% y/y figure. The higher reading will likely further fuel market expectations for Federal Reserve rate hike activity in the near future. Finally, the unemployment rate for August remained flat at 3.9% though surveys expected a downtick to 3.8%.
Amazon’s market cap hits $1 trillion. With its 66.9% gain in 2018 so far, Amazon (AMZN) became the second U.S. company – following Apple (AAPL) – to hit the $1 trillion market capitalization milestone.11 It took Amazon only 165 trading days to go from $600 billion to $1 trillion in market cap12 compared to Apple which took about 6 years.13 With technology company market caps continuing to grow and the tech sector contributing about half of the 2018 S&P 500 Index gain,14 some investors are concerned about the makeup of U.S. equity markets. At this point, the top 10 S&P 500 constituents represent about 22% of the index’s market cap.15
U.S.-China trade tensions remain high. Late last week, President Donald Trump declared the U.S. was considering quickly moving forward with tariffs on $267 billion of China exports on top of finalizing details on a previous plan to implement another round of tariffs on $200 billion of goods. Also, China economic data released last week included a moderate drop in imports and exports from their respective prior levels.
This Week Preview
ECB and BOE both meet this Thursday. Both the European Central Bank (ECB) and Bank of England (BOE) will hold their September monetary policy meetings this Thursday. Investors are expecting the ECB to continue its plan to reduce its asset purchase program to €15 billion per month for the last three months of 2018 before concluding the program in December. ECB President Mario Draghi’s latest statements indicate that the central bank will not consider increasing the main policy rate above 0% until after the summer of 2019. Looking at the BOE, the BOE has hiked interest rates twice since November 2017 to combat rising inflation that reached 3.1% on a year-over-year basis in late 2017. UK headline inflation gradually declined to 2.4% y/y by April, though the measure saw a slight uptick to 2.5% y/y in July. We believe investors will continue to monitor inflation to make sure it doesn’t move further away from the central bank’s 2% target.
U.S. inflation data expected to remain near prior levels. U.S. Consumer Price Index (CPI) data will be released on Thursday with surveys showing headline and core readings of 2.8% y/y and 2.4% y/y, respectively. Headline CPI is expected to tick down after steadily increasing since the beginning of the year while core CPI is expected to remain flat with the prior level. The Federal Reserve (Fed) will continue to monitor U.S. inflation, with markets continuing to expect a Fed rate hike in September,16 which would be the central bank’s third move in 2018 thus far.
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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, Bloomberg Dollar Spot Index (BBDXY) tracks the performance of a basket of 10 leading global currencies versus the U.S. Dollar. It has a dynamically updated composition and represents a diverse set of currencies that are important from trade and liquidity perspectives. Performance as of 02Jan2018 – 07Sep2018.
- 2. Goyal, K. & Subhadip Sircar. Bloomberg Markets. “Rupee Tumbles to New Record as India Scrambles to Halt Decline.” Retrieved on 10Sep2018: https://www.bloomberg.com/news/articles/2018-09-10/rupee-tumbles-as-current-account-deficit-widens-to-5-year-high.
- 3. Bloomberg, MSCI Emerging Market Equities Index returns 04Sep2018 – 07Sep2018.
- 4. Bloomberg, MSCI Emerging Market Equities Index returns 02Jan2018 – 07Sep2018.
- 5. Bloomberg, MSCI U.S. Equities IMI Index and MSCI ex-U.S. Equities IMI Index returns 04Sep2018 – 07Sep2018.
- 6. Bloomberg, MSCI World Index returns 02Jan2018 – 07Sep2018.
- 7. Bloomberg, MSCI U.S. Equities IMI Index returns 02Jan2018 – 07Sep2018.
- 8. Bloomberg, In this example a comparison is being made between MSCI U.S. Equities IMI Index returns versus both the MSCI ex-U.S. Equities IMI Index returns and the MSCI Emerging Market Equities Index returns 02Jan2018 – 07Sep2018.
- 9. Bloomberg, In this analysis we are making a comparison between the differences of the 2-Year nominal Treasury rates versus the 10-Year nominal Treasury rates using data available as of 07Sep2018. Basis Point (BPS) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 1/100th of 1%, or 0.01%, or 0.0001, and is used to denote the percentage change in a financial instrument.
- 10. Bloomberg, Yields of the 2-Year nominal Treasury rates and the 10-Year nominal Treasury rates using data available as of 07Sep2018.
- 11. Bloomberg, Amazon.com, Inc. (AMZN) stock price as of the end of trading on 07Sep2018.
- 12. Bloomberg, Amazon.com, Inc. (AMZN) stock price for the time period of 22Jan2018 – 07Sep2018.
- 13. Bloomberg, Apple Inc. (AAPL) stock price for the time period of 02Aug2012 – 02Aug2018.
- 14. Bloomberg. S&P 500® Technology Index performance 07Sep2018. Comprising those companies included in the S&P 500 that are classified as members of the GICS® technology sector. The Global Industry Classification Standard (GICS) is an industry taxonomy developed in 1999 by MSCI and Standard & Poor's (S&P) for use by the global financial community. The GICS structure consists of 11 sectors, 24 industry groups, 68 industries and 157 sub-industries into which S&P has categorized all major public companies. GICS is used as a basis for S&P and MSCI financial market indexes in which each company is assigned to a sub-industry, and to a corresponding industry, industry group and sector, according to the definition of its principal business activity.
- 15. Bloomberg, S&P500 Index market cap constituents as of 07Sep2018.
- 16. Bloomberg, Fed Funds Futures Index 07Sep2018. 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.
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.