The markets’ roller coaster ride continues with US equity futures opening higher this morning on the back of strong corporate earnings from HSBC, after a tumultuous week. The Euro strengthened against the US Dollar during European market trading hours after S&P Global Ratings lowered its outlook on Italy to negative but kept the sovereign rating at BBB, two notches above junk. Three major central banks are scheduled to release their key rate decisions later this week with two of the bank’s governors to hold post-meeting press conferences. A slew of key economic data will be released abroad, with all eyes on the U.S. October job’s report on Friday (see more below).
As of late, the major drivers behind the markets’ moves have largely remained the same: trade fears, geopolitical risks, slowing global economic growth, and higher interest rates globally. Ten-year US Treasury yields experienced sharp fluctuations, finishing the week 12 basis points lower at 3.078%, roughly where it traded a month ago. Concerns over Italy’s budget, global economic growth, and weaker than expected earnings from the technology sector prompted a risk-off sentiment as investors flocked back to safe-haven assets such as U.S. Treasuries. Despite the trepidation, two Fed Officials, Loretta Mester and Raphael Bostic, reiterated the need to continue to hike rates, albeit at a gradual pace.
Last week, both the Dow and S&P 500 fell precipitously, wiping out their year-to-date gains for 2018. The Nasdaq followed suit, enduring its biggest decline not seen since 2011. While the stock markets bounced back on Thursday, they took a beating on Friday on the back of disappointing earnings results from technology juggernauts Amazon and Alphabet (the parent owner of Google). The S&P 500 ended its worst week since May (closing the week at 2,658.69), falling more than ten percent from its highs seen on September 20th. The aforementioned tech giants aside, corporate earnings have generally remained strong, with nearly 80% of S&P 500 firms that have reported, beating analysts’ expectations; however, going forward many firms are noting rising costs and are wary of the potential impact of tariffs.
I. U.S. Economic Data/Markets
- U.S. GDP: economy expanded 3.5% in 3Q 2018.
- While consumer spending remained strong (not surprising given the low levels of unemployment), solid government spending and inventory investments also contributed to the growth story.
- Business spending and residential investment declined for the third straight quarter.
- Widening trade gap took almost 1.8% off from the GDP level, given strong U.S. demand for imports and a decline U.S. export goods such as soybeans and petroleum.
- Core Personal Consumption Expenditures, the Fed’s preferred gauge for inflation, rose 1.6% annualized in the third quarter, shy of the Fed’s target of 2%.
- New Home Sales saw its fourth consecutive monthly decline, falling 5.5% in September, partly on the back of higher mortgage rates. The 30-year fixed mortgage rate is at 4.90%, roughly over 100 basis points higher from a year ago.
- Fed’s Beige Book noted a modest pick-up in wages and prices. Uncertainty regarding tariffs and labor shortages were highlighted. Consumer spending was modest and tourism served as a boon to the economy.
II. Central Banks: ECB had its meeting last week, with the BoJ, PBOC, and BoE on the docket this week.
- European Central Bank kept rates unchanged with the base rate at -0.4% and reaffirmed its intentions to end monetary easing by year-end.
- While ECB President Draghi acknowledged uncertainties regarding trade tariffs and market volatility, he appeared to play down concerns regarding Italy’s budget crisis and economic outlook for the Eurozone noting weaker momentum but not a downturn.
- Draghi also seemed comfortable with the Eurozone’s inflation outlook, noting wage growth was “very comforting”.
- He emphasized that the ECB would not come to Italy’s aid, stating that the ECB’s role is to maintain price stability, not to finance government deficits, but was confident that Brussels and Italy will come to an agreement.
- Bank of Japan is largely expected to keep its key rate unchanged. Inflation remains stubbornly below the bank’s target. Recent data reflected that Tokyo’s core inflation data remained unchanged month-over-month and rose 1% in October from a year ago.
- The People’s Bank of China is expected to ease its monetary policy. The currency has taken a beating this year on the back of U.S. trade tensions, slowing economic growth and a stronger USD.
- Separately the PBOC announced last week its willingness to offer more funds to private companies as a measure of support. The private sectors has been largely impacted by the government’s attempts to curb debt and cut the shadow banking sector.
- Bank of England will likely follow the BoJ’s suite and keep its key rate unchanged. While there are signs of rising wages and price pressures, looming over the bank is the lack of progress regarding Brexit negotiations.
Key data/events this week:
The tripleheader regarding major central bank decisions aside, there is a slew of key economic data released throughout the week including key CPI and unemployment data in the Eurozone. A greater focus will be on the U.S. towards the end of the week when October unemployment data will be scrutinized.
- GBP Budget Approval/Mortgage Approvals (Monday)
- U.S. core personal consumption expenditures
- U.S. personal income
- JPY unemployment rate
- AUD Building permits (Tuesday)
- German unemployment
- Italian/Eurozone GDP
- EUR business climate
- S&P/Case-Shiller Home Price Indices
- German CPI
- NZD Building Permits
- AUD HIA New Home Sales (Wednesday)
- AUD CPI
- CNY PMI manufacturing/non-manufacturing data
- Bank of Japan rate decision/press conference
- German retail sales
- Eurozone/French/Italian CPI
- Eurozone unemployment
- Spanish GDP
- U.S. MBA mortgage applications
- U.S. ADP employment change
- CAD GDP
- U.S. Chicago PMI
- AUD AIG performance of the Mfg Index
- JPY foreign investments in domestic bonds/equities
- AUD trade data (Thursday)
- CNY Caixin Manufacturing PMI
- CNY PBOC Rate Decision
- Bank of England Rate Decision
- U.S. ISM Manufacturing/Prices Paid
- U.S./CAD Markit Manufacturing PMI
- AUD retail sales (Friday)
- U.S. October unemployment data
- CAD unemployment data
- CAD trade data
