The S&P 500 and the Dow Jones Industrial Average closed at new highs last week, reaffirming the market’s confidence in the strength of the U.S. economy, despite concerns regarding trade tensions between the U.S. and other countries. Similarly, Treasury yields continued their upward trend as market practitioners remain bullish on the U.S. economic outlook with a risk-on sentiment. Ten-year Treasury yields hit a four-month high (3.081%) during the week, nearing its seven-year high of 3.109%. The market’s optimism may shape the much anticipated FOMC meeting this week, which concludes on Wednesday.
The Fed is largely expected to hike another 25 basis points, the key focus, however, will be on the officials’ projections for growth, inflation, and rates out to 2021. In June the Fed predicted rates would increase to 3.4% by 2020. If they lower their rate projections beyond 2021, it may signal concerns for a potential recession or slowdown.
While the Fed will take center stage this week, market practitioners will keep an eye on any progress between China and U.S. trade talks, which for now seems unlikely as Chinese officials canceled scheduled discussions late last week on the back of renewed threats by the Trump Administration. Further, a slew of key data releases including the Fed’s favored indicator of U.S. inflation data and Chinese manufacturing data coupled with a myriad of speeches by key central bank officials globally are scheduled for the week as well.
Finally, this week also wraps up the third quarter for the calendar year, as the market keenly awaits corporate earnings data that will largely be kicking off next month. Many analysts anticipate stellar results as the projected earnings growth rate is expected to be nearly 20%. If their predictions are true, it will be the third-best earnings growth in about eight years.
I. U.S. Economic Data/Markets
- August Housing Starts data surprises to the upside increasing 9.2% month-over-month, largely driven by the multifamily sector.
- August Building Permits data reflected sins of cooling at 1.229M versus expectations of 1.310M.
- July data was revised higher to 0.7% from 0.5%.
- Weekly unemployment claims fall to the lowest level in nearly 5 decades.
- Initial claims fell by 3k to 201k, beating market expectations of an increase to 210k.
- It is the lowest level since November 1969.
- Philadelphia Fed Index jumped in September after steeply falling last month. The index rose to 22.9, compared to 11.9 a month ago.
- Stock Indices Hit Highs – robust economic data continues to fuel confidence prompting the bull market to continue its rally. Corporate earnings to be released in the coming weeks are expected to be strong, further fueling the equity markets.
- The Dow Jones Industrial Average hit 26,656.98 eclipsing its prior all-time high close of 26, 616.71 in January. The index up about 8% for the year.
- Similarly, the S&P 500 closed at a new high of 2,930.75 late last week. The index is nearly 10% higher for the year.
II. Trade Talk
- As expected, the Trump Administration imposed $200 billion of levies on Chinese early last week that will take effect on September 24th. The levies will start at 10% and will climb to 25% by January 1st. This latest move is in addition to the $50 billion of levies already imposed on Chinese exports.
- President Trump noted early in the week that additional levies on $267 billion of Chinese goods may come into play in the near future. This net potential round of taxes may include a range of consumer goods including toys and electronics.
- China retaliated by imposing tariffs on $60 billion of U.S. goods.
- Chinese and U.S. officials were scheduled to resume negotiations in the coming days, but Chinese officials canceled talks late in the week on the back of Trump’s threats of additional levies.
- The U.S. and Canada’s attempts to revamp NAFTA continued, with little resolve in sight. Canada is adamant that the U.S. withdraw a threat of possible tariffs on the auto industry.
- President Trump threatened a 25% levy on Canadian auto exports if the countries fail to reach an agreement.
III. Other
- The GBP took a hit on Friday as UK Prime Minister Theresa May noted that the EU and UK were at an impasse as it relates to Brexit negotiations.
- The pound dropped between 1-1.5% to 1.31 on the back of May’s comments.
- Long-end Japan Government Bond Yields rose to levels not seen in a year or more on Friday as the Bank of Japan slightly tapered its bond buying from JPY 60 billion to JPY 50 billion of 25-year to 40-year bonds – catching the market off guard.
- The 20-year JGB yield to 0.645%, its highest since April 2017, while the 30-year and 40-year bonds hit 0.89% and 1.04% respectively.
- Global stock indices also rallied, with as the MSCI All-Country World Index edged towards a seven-month high.
- Oil prices continued to rally for a second straight week, nearing multi-year highs as supply disruptions are expected, in part due to the U.S. sanctions on Iran. Brent is around four-year highs at just below $80 per barrel.
This week: While all eyes are on the FOMC and the post-meeting press conference with Chairman Powell, there are a number of key data releases and speeches throughout the week.
Key data/events include:
- German IFO data reflecting business expectations and current conditions (Monday)
- U.S. Chicago Fed National Activity Index
- Bank of Japan monetary policy meeting minutes
- Bank of Japan Gov. Kuroda’s speech regarding monetary policy (Tuesday)
- U.S. Housing Price Index
- U.S. S&P/Case-Shiller Home Price Indices
- NZD trade data
- U.S. New Home Sales (Wednesday)
- FOMC Meeting/Press Conference
- NZD Central Bank Meeting/Press Conference
- EUR Economic Bulletin/Business Climate (Thursday)
- German Harmonized Index of Consumer Prices
- U.S. GDP
- U.S. Personal Consumption Expenditures QoQ
- U.S. Durable Goods
- U.S. Pending Home Sales
- FOMC Official Kaplan speaks
- Bank of Canada Gov. Poloz speaks
- JPY inflation/unemployment/trade/retail data
- CNY Caixin PMI (Friday)
- GBP GDP
- EUR Inflation data
- U.S. Personal Consumption Expenditures YoY
