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Financial Markets Commentary For the week of January 22, 2019

Key Market Data

01/11/2019 01/18/2019 One Week Change YTD One Year
S&P 500 Index 2,596.26 2,670.71 +2.87% +6.63% -2.66%
MSCI EAFE Index 1,786.13 1,805.10 +1.06% +5.04% -12.84%
Barclays Capital U.S. Aggregate Bond Index 2,050.23 2,046.35 -0.19% -0.01% +0.79%
10-year Treasury Note Rate 2.702% 2.785% +8.3 basis points +10.0 basis points +15.8 basis points

The stock market was up for the fourth week in a row last week, easing the damage caused by the fourth-quarter’s swoon and putting the major indexes almost back where they were at the beginning of 2018 as they turned in their best start to a year since 1987. This came despite the fact that the federal government remained shut down with little signs of progress being made, not to mention Parliament’s rejection of Prime Minister Theresa May’s Brexit plan. In summary, investors continued to accentuate the positive: a strong American economy, a go-slow approach from the Federal Reserve, and what seemed like headway in the trade talks with China.

Trade talk progress; China’s slowdown and stimulus

Investors cheered last week by what appeared to be progress in the trade talks with China. At week’s end, Bloomberg reported that China was going to pledge to buy more goods and services from the United States with the goal of eliminating the trade deficit by 2024 — that deficit was a record $323.3 billion in 2018. In addition, a meeting between the two nation’s top trade negotiators was said to be scheduled for the near future. In the meantime, there was also a report that Treasury Secretary Steven Mnuchin would like to suspend or moderate some of the tariffs already in place against China as a sign of good faith, though Robert Lighthizer, the U.S. Trade Representative, is said to be against any such concessions. Meanwhile, the United States continued to pressure China on other fronts, with federal prosecutors announcing that they were going to pursue criminal charges against Huawei Technologies for intellectual property theft from its U.S. partners, including T-Mobile.

All of this comes as China reported that its GDP fell to 6.6 percent in 2018, the slowest pace for growth since 1990 – and many outside analysts think that the Chinese government inflates its GDP estimates. China also reported last week that both imports and exports declined more than forecast in December, off 7.6 percent and 4.4 percent respectively, though the trade gap with the United States hit a new high. There were some positives, however, with retail sales up 8.2 percent in December from the month before, and industrial production rising a better-than-expected 5.7 percent. In response to the slowdown, the People’s Bank of China said it would take steps to stimulate growth, including offering more credit for smaller companies, making infrastructure investments, and cutting some taxes.

Shutdown stasis

The longest shutdown in U.S. history continued last week with little progress despite President Trump’s offer to provide temporary immunity from deportation for some illegal immigrants in exchange for the $5.7 billion he wants for a border wall with Mexico. The House Minority Leader Nancy Pelosi (D, CA), described the offer as a “nonstarter,” but Senate Majority Leader Mitch McConnell (R, KY), said he planned to bring a bill incorporating the new plan to the Senate floor this week. The House is also expected to pass bills for reopening the government, but not funding the wall, but so far McConnell has not moved any of the House’s measures to the Senate floor for a vote.

The Brexit and “Plan B”

As expected, Theresa May’s plan for the Brexit, which is scheduled to take effect on Mar. 29, was rejected by Parliament by a vote of 432 to 202, one of the worst defeats for a prime minister since 1900, with the key concern being the disposition of the border between Ireland, which will remain in the European Union (EU), and Northern Ireland. That led to a no-confidence vote for May which she survived because the fellow Conservative Party members who had voted against the plan supported her in the face of a challenge from the Labour Party leader Jeremy Corbyn. May presented her very similar “Plan B” yesterday while inviting amendments from Parliament, but it appears to have been rejected by EU leaders before she even gave the speech. Now the question is whether Britain will leave the EU at the end of March with no plan – the so-called “hard exit” – work out an extension with the EU, or, despite May’s repeated resistance to the idea, hold a second referendum on EU membership.

Q4 earnings

The fourth-quarter earnings season is underway and last week a number of banks including JPMorgan Chase, Wells Fargo, Bank of America, and Goldman Sachs, posted strong earnings, partly because of higher interest rates. FactSet estimates that fourth-quarter earnings for S&P 500 companies will be up 10.6 percent from a year earlier.

In other news, the Labor Department said the Producer Price Index fell 0.2 percent in December from November, the largest monthly drop since August of 2016, though prices were up 2.5 percent from a year earlier. Core Producer Prices, less food and energy, fell 0.1 percent month over month but increased 2.7 percent year over year. The Fed reported that industrial production rose 0.3 percent in December from November and was up 4 percent from a year earlier. Manufacturing production improved 1.1 percent in December from the month before. Capacity utilization advanced 0.1 percent in December to 78.7 percent. The University of Michigan’s Consumer Sentiment Index fell from December’s 98.3 to 90.7 in January, well below the forecast and the lowest reading since October of 2016, because of concerns about a trade war, stock market volatility, and the shutdown. The Current Conditions Index had its biggest drop since December of 2012. The Fed’s Beige Book report showed that business optimism has dipped recently with some companies reconsidering investments scheduled for 2019. The National Association of Home Builders’ housing market index of builder sentiment was 58 in January compared to 56 in December. And first-time jobless claims for the week ending Jan. 12 fell 3,000 to 213,000; the four-week moving average declined 1,000 to 221,750.

A look ahead

This week’s list of releases, which includes economic updates that have been held up by the government shutdown and which may or may not be released, includes the latest on retail inventories, new and existing home sales, construction spending, factory orders, the trade balance, retail sales, business inventories, housing starts and building permits, and the Conference Board’s leading index.