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Financial Market Commentary For the week of February 18, 2019

Key Market Data

02/08/2019 02/15/2019 One Week Change YTD One Year
S&P 500 Index 2,707.08 2,775.59 +2.53% +11.02% +3.65%
MSCI EAFE Index 1,804.73 1,840.10 +1.96% +7.23% -7.56%
Barclays Capital U.S. Aggregate Bond Index 2,071.09 2,069.13 -0.09% +1.10% +3.42%
10-year Treasury Note Rate 2.636% 2.664% +2.8 basis points -2.1 basis points -24.6 basis points

A shutdown was averted, headway was apparently made in the U.S./China trade negotiations – and the major stock indexes jumped accordingly. The Dow, which had only recently climbed back to 25,000-point mark, closed in on 26,000 by end of day Friday, and both the Dow and the Nasdaq have now been up for eight weeks straight, while the S&P 500 made it three in a row.

At the beginning of last week, it looked like a second shutdown was imminent after negotiators from both sides of the aisle hit a wall, so to speak. But, perhaps fearing the economic and political damage another shutdown would lead to, they regrouped and agreed to a deal. President Trump said he’d sign the bill, but also said that he was going to take executive action to declare a national emergency to get the money for the border wall that was not in the deal, a step that’s likely to be challenged in court by Democratic lawmakers.

The trade talks

While the Democrats and Republicans agreed to fund the government, China and the U.S. are still working on a deal that also has a deadline – on Mar. 2, tariffs on $200 billion in Chinese goods will jump from 10 percent to 25 percent unless an accord is reached. Last week, the market rallied after both sides said that progress had been made when Treasury Secretary Stephen Mnuchin and U.S. Trade Representative Robert Lighthizer went to Beijing. This week, China’s lead negotiator, Vice Premier Liu He, will be in Washington, and Trump has indicated a willingness to extend the deadline if it looked as if there was further progress.

Auto tariffs?

Trade talks may soon open on another front as President Trump has received the report he requested from the Commerce Department on imported cars and auto parts and whether such imports represent a national security threat. If so, Trump may move to raise the tariffs on cars and auto parts, a move that many in the auto industry and congressmen on both sides of the aisle are against. Senator Charles Grassley (R, IA), the chairman of the Senate Finance Committee, said such tariffs “would be a huge tax on consumers”; 40-to-50 percent of U.S. cars are built with foreign-made parts, according to the Center for Automotive Research.

Retail sales and industrial output

Despite the market’s strong week, not all of the news was upbeat, though some reports may have been impacted by the federal shutdown and worries about trade. In a report delayed by the shutdown, the government said retail sales fell 1.2 percent in December from November, the biggest month-over-month drop since 2009, despite the fact that most earlier reports indicated that retail sales had been robust during the holiday season. Sales were still up 2.3 percent from a year earlier. And then the government reported that industrial output declined 0.6 percent in January from December, the first drop since May of 2018, while manufacturing fell 0.9 percent.

Falling revenues, higher debt

A strong economy and a low jobless rate aside, the government said that revenues fell 0.4 percent for all of 2018 to $3.33 trillion, while government spending for the calendar year rose 4.4 percent to $4.2 trillion. The budget gap for 2018 was $873 billion compared to $680.8 billion the year before, and it’s expected to hit $900 billion this year on its way to passing the trillion-dollar mark in 2020, according to the Congressional Budget Office.

Germany’s slowdown

Germany is the world’s fourth largest economy, but it barely avoided falling into recession at the end of 2018. Growth in the fourth quarter came in flat after a 0.2 percent decline in the third quarter, which had been the first quarterly contraction since 2015 (GDP contraction for two quarters in a row is generally regarded as a recession).

Amazon leaves Queens

In November, Amazon said it would open one of its two new campuses in New York, spending $2.5 billion and creating 25,000 jobs over a ten-year period. Last week, apparently frustrated by the pushback from New Yorkers about the nearly $3 billion in subsidies and tax breaks it took to close the deal, Amazon pulled out, leading New York’s Mayor Bill de Blasio to say, “Out of nowhere, they took their ball and went home.”

In other news, the price of U.S. crude hit a three-month high after it was reported that the Organization of Petroleum Exporting Countries (OPEC) was on track with the cuts announced late last year to lower output by 1.2 million barrels of oil a day. The Federal Reserve reported that household debt rose $32 billion to $13.54 trillion in the fourth quarter, but savings are well up and the assets to liability ratio has improved and is now back to the level it first hit in 1985. The consumer price index was unchanged in January from December but up 1.6 percent from a year earlier; core CPI, less food and energy, rose 0.2 percent for the month and 2.2 percent for the year. The producer price index fell 0.1 percent in January from December but advanced 2 percent year over year; core PPI increased 0.3 percent from December and 2.6 percent for the year. The government said that the number of job openings at the end of December hit 7.34 million, and there were 1.04 million more openings than job seekers. The National Federation of Independent Business’s small business optimism index fell 3.2 points in January to 101.2, the lowest reading since before the 2016 election but well above the historical average of 98. The University of Michigan’s Consumer Sentiment Index climbed to 95.5 in February from January’s 91.2. The Bloomberg weekly Consumer Comfort Index was also up, advancing to 60 last week from 58.2 the week before, while the gauge for the buying climate hit an eighteen-year high. And first-time jobless claims for the week ending Feb. 9 rose 4,000 to 239,000; the four-week moving average climbed 6,750 to 231,750.

A look ahead

The holiday shortened week will include updates on orders for durable and capital goods, the Conference Board’s leading index, and existing home sales, as well as the release of the minutes from the Fed’s December meeting.