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Financial Markets Commentary For the week of December 03, 2018

Key Market Data

11/23/2018 11/30/2018 One Week Change YTD One Year
S&P 500 Index 2,632.56 2,760.17 +4.85% +5.10% +6.26%
MSCI EAFE Index 1,792.51 1,809.56 +0.95% -8.92% -7.43%
Barclays Capital U.S. Aggregate Bond Index 2,006.99 2,009.68 +0.13% -1.79% -1.34%
10-year Treasury Note Rate 3.041% 2.989% +5.2 basis points +58.3 basis points +57.8 basis points

After two weeks during which stocks were battered, investors were more than ready for a glimmer of good news. They got it on Wednesday when the Federal Reserve’s Chairman Jerome Powell said the benchmark rate was “just below” the neutral rate, leading investors to conclude that interest rates would probably not rise as fast as feared. The Dow soared on the news, gaining 617.70 points, and by the end of day on Friday, the Dow was up 5.16 percent, its best week since 2016, and the S&P 500 had added 4.85 percent, its best showing since 2011. As a result, the three major indexes edged into the black for the month, with the S&P 500 up 2.0 percent, the Dow 2.1 percent, and the Nasdaq 0.5 percent. Better still; on Saturday, President Trump and China’s President Xi Jinping had a meeting at the Group of 20 (G20) gathering in Buenos Aires and agreed to a truce in the trade war that’s been casting a shadow over the global economy.

A temporary truce in the trade war

Despite talk of a second Cold War and President Trump threatening yet another round of tariffs, the two sides came to terms on a truce in Buenos Aires on Saturday night. The United States said issues such as technology theft and cyberwarfare would be discussed and that there would be a ninety-day deadline for negotiations, after which the current tariffs on $200 billion worth of Chinese exports would go from 10 percent to 25 percent, originally slated to happen on Jan. 1. The Chinese said they’d buy an unspecified amount of U.S. products. There’s some question as to the details, however. At a post-meeting press conference, the Chinese didn’t mention the other issues or the deadline. Separately, after much debate, the G20 leaders issued a communiqué affirming the importance of multilateral trade, but only after making concessions to China, which insisted that there would be no mention of unfair trade practices, and to the United States, which demanded that there was nothing about protectionism.

NAFTA and the USMCA

While in Buenos Aires, the president also signed the agreement that will replace the North American Free Trade Agreement (NAFTA) with the United States-Mexico-Canada Agreement (USMCA). There’s some question as to whether or not the USMCA will get through Congress once the Democrats take over the House in January. Regardless, President Trump said he would soon terminate NAFTA, giving legislators six months to accept or reject the new trade deal.

The Fed

As noted, Powell calmed investors by saying the Fed was close to reaching its neutral rate – one that neither spurred not hindered growth – only a month after having said the rate was a “long way” from neutral. The Fed also released the minutes of its November meeting which indicated that it was likely to raise its rate when it meets in December, but that committee members were unsure how many hikes there’d be in 2019, from two to four, and are keeping a watchful eye on the trade war, stock market volatility, and any slowdown in global growth.

GM to cut jobs

General Motors announced that it would be cutting 14,800 jobs in North America, drawing the ire of President Trump. GM’s CEO Mary Barra said the goal was to cut costs and put the money into electric and self-driving cars, and that the company was acting while it was posting solid earnings “to get in front of it.” She later fielded calls from both Canada’s Prime Minister Justin Trudeau and President Trump, with the latter later saying he told her, “You’re playing around with the wrong person,” and threatening to revoke the federal subsidy on GM’s electric cars. He subsequently said he was reconsidering tariffs on imported cars in light of the layoffs.

OPEC and Oil

The Organization of Petroleum Exporting Countries (OPEC) will meet in Vienna on Thursday to address the tumbling price of oil: U.S. crude and Brent plummeted 22 percent in November, the biggest plunge for both since 2008. On Friday, an OPEC panel recommended a cut of 1.3 million barrels a day, but there’s still no consensus on what will happen in Vienna, mainly because Russia, a non-OPEC member but major producer, has sent out conflicting signals about whether or not it will agree to cuts.

A Saturday shutdown?

The government will run out of money on Saturday and the two sides are trying to find a compromise – and also expect to agree to a “spending patch” to give them more time. The president said he’ll reject any bill that doesn’t include $5 billion for a border wall with Mexico, and the Democrats have shown no sign of giving in; the bill requires 60 votes in the Senate.

In other news, the government’s latest estimate for third-quarter growth was unchanged at 3.5 percent. Personal consumption expenditures (PCE) rose 0.6 percent in October and personal income was up 0.5 percent. The PCE price index increased 0.2 percent from September and 2 percent for the year; the core index, less food and energy, gained 0.1 percent for the month and 1.8 percent for the year. Wholesale inventories rose 0.7 percent in October from September, while retail stockpiles advanced 0.9 percent. New home sales fell 8.9 percent in October from September to an annual rate of 544,000 and were down 12 percent from a year earlier. The National Association of Realtors said its index of sales of previously owned homes fell 2.6 percent to 102.1 in October and was down 6.7 percent from a year earlier. The Conference Board’s index of consumer confidence fell to 135.7 in November from 137.9 in October, but that was the highest reading since 2000. And first-time jobless claims for the week ending Nov. 24 were up 10,000 to 234,000; the four-week moving average was up 4,750 to 223,250.

A look ahead

On Wednesday, the New York Stock Exchange and the Nasdaq will be closed to honor the memory of George H. W. Bush, who died on Friday. This week’s major releases will include the latest on the Institute for Supply Management’s manufacturing and nonmanufacturing indexes, construction spending, vehicle sales, the Fed’s Beige Book, third-quarter productivity, the trade deficit, factory orders, wholesale inventories, consumer credit, and, on Friday, the jobless rate, expected to remain unchanged at 3.7 percent.