BMA Market Insights: Equities And Rates Open Higher As Holiday Sales Take Off

Equity futures are pointing to an open in the black as online retail sales pulled in nearly $6.22 billion over the long weekend, an increase of 26.3% y-o-y. As Cyber Monday kicks off today, investors will keep an eye on online sales. Both Brent (+2.23%) and WTI (+1.39%) crude oil prices opened higher this morning. Ten-Year U.S. Treasury rates are up 2.2bps to 3.066%. Euro and Sterling are +.24% against the USD as headline news break that the EU backs May’s Brexit plans. There are also talks of a budget revision over the weekend from Italy after mounting pressure from the EU.

The markets’ RISK-OFF mentality continued last week, as the descent in technology stocks and crude oil prices persisted. Uncertainty surrounding trade coupled with concerns regarding slowing global growth weighed on the markets. All three major U.S. stock indices (S&P 500, Dow Jones Industrial and Nasdaq) ended the week lower. Investors flocked toward U.S. Treasuries as safe-haven assets, which pushed yields down. Ten-year Treasury yields dropped over five basis points over the week and hovered around 3.05% on Friday.

Despite jitters in the equity markets, the Federal Reserve appeared to remain on track for another rate hike at its December 19th meeting. Last week, Fed Official John Williams acknowledged the current low levels of interest rates, despite the Fed’s recent tightening of monetary policy. The Fed Funds rate is currently 2.25%. In comparison, one-month LIBOR is 2.337%. Williams expected the Fed to continue with gradual rate increases. Similarly, Fed Chairman Powell recently noted the selloff in equities but said market moves “are one of many factors” the Fed considers regarding its rate decision. The market keenly awaits for any change in sentiment in the November FOMC minutes, to be released later this week. Further, at the December FOMC meeting, officials will also provide economic and rate projections, any changes to forecasts provided since the September meeting will be closely monitored.

Outside of the FOMC minutes, a slew of data is on the calendar for the week ahead. Domestically, key economic releases will occur midweek, which includes the Feds’ favored measure of inflation, GDP, and housing data. Given recent concerns regarding slowing global growth, GDP data out of Switzerland, Italy, and Canada towards the end of the week will be closely watched. A number of potentially market-moving events are also on the docket, including the G20 Summit where market practitioners await for any progress regarding trade talks between China and the U.S., ECB President Draghi speaks at the European Parliament and Fed Chairman Powell is scheduled to speak on the Federal Reserve’s framework for monitoring financial stability.

I. U.S. Economic Data/Markets

Housing starts rose 1.5% m-o-m in October due to growth within the multi-family sector.
- Housing starts fell for single family homes as did residential building permits, which dropped 0.6% from September.
Existing home sales rose 1.4% m-o-m in October.
- Y-o-Y sales dropped 5.1%, the biggest decline since 2014.
- Weakening demand on the back of higher mortgage rates has largely impacted sales.
- According to Freddie Mac, 30-year mortgage rates were 4.83% last month, up nearly 80 basis points since January.
October durable goods orders surprised to the downside, with the biggest monthly decline since July 2017, dropping 4.4% versus expectations of a 2.6% decline.
- A drop in orders suggested a softening in business investment and thereby growth in the fourth quarter.
- Concerns surrounding a trade war and a stronger USD likely attributed to weaker business sentiment.
Michigan consumer confidence survey surprises to the downside at 97.5 versus expectations of 98.2. Increased volatility within stock markets of late likely contributed to the weaker sentiment.
Oil plunges to the lowest level in a year during London trading hours on Friday.
- Brent crude hit $58.57/barrel on Friday, the lowest since October 2017, similarly WTI crude hit $50.60, its lowest level in 13 months as well.
- Increased supply from the U.S. coupled with a slowdown in global growth and trade tensions contributed to the decline in prices.
- The Organization of the Petroleum Exporting Countries is expected to trim output at its December 6th meeting.
Two Major Wall Street Banks projected five additional rate hikes by the end of 2019, which would bring the Fed funds rate to 3.50%.
- Both Goldman Sachs and JP Morgan reportedly expected the Fed to raise rates in December and then four more times next year, resulting in a Fed funds rate of 3.50%. In September, the Fed provided a median projection of its key rate to be 3.1% in 2019. The committee is expected to provide revised forecasts at its meeting next month.
  - Strong unemployment and higher inflation partly attributed to the projections.
  - Despite the recent selloff in equities, Goldman Sachs noted that since 1994 the Fed was only accommodative when economic growth was deteriorating or there was a significant meltdown in terms of financial conditions.
  - For additional insight into historical vs realized rate projections, please reach out to your BMA advisor.

II. Trade

Chinese/U.S. Trade
- Escalating trade tensions between the U.S. and China could negatively impact global growth and force the Fed to raise rates on the back of pricing pressures, according to the Organisation for Economic Co-operation and Development (“OECD”).
  - The OECD predicted that a full-blown trade war could lower global GDP by 0.8%.
  - The organization lowered its global growth outlook for 2019 to 3.5% from 3.7% on the back of trade concerns and higher interest rates.
  - OECD also lowered its growth projections for emerging economies such as Brazil, Russia, and Turkey as they will likely see capital outflows on the back of higher U.S. rates.
Brexit
- After more than two and half years, the EU and UK finally came to an agreement regarding Brexit. However, despite the agreement, UK Prime Minister Theresa May still needs the proposal to be approved by the UK Parliament early next month.
- May faces opposition from other parties and from some within her own Conservative Party. EU officials noted no further concessions would be offered if the UK Parliament rejects the agreement.
- Even if the agreement is passed by Parliament, uncertainty may still linger on details regarding trade and security between the EU and the UK. The current agreement included:
  - Ensuring there was no physical border between Northern Ireland and the Republic of Ireland.
  - The UK paying $50 billion to EU regarding commitments the UK had made to the EU’s budget.
  - The EU will maintain the rights of UK currently citizens living in the region and the UK will reciprocate.

III. Other

EU PMI data, a reflection of business growth, came in at 52.4 (versus expectations of 53), the lowest level since 2014.
- A slowdown in exports, trade concerns surrounding the U.S. and a general slowdown in global growth in part drove the sentiment.
- The Euro dropped around 0.4% on the back of the data and was trading around $1.13 at the time of this writing.
German PMI data falls to the lowest reading in nearly four years coming in at 52.2, falling from 53.4 in October.
- PMI tracks the manufacturing and service sectors, which account for two-thirds of the economy.
- Weak demand from China, Italy, and Turkey attributed to the lower reading.
- Data reflected the biggest monthly drop in new export orders in six years.
- The euro dropped to a five day low on the back of the news hovering near $1.343.
Italian budget – The EU Commission is looking into disciplinary actions as Italy refuses to comply its budget with EU standards. The Commission will likely impose a fine to the Italian government given its non-compliance. It has initiated a debt-based Excessive Deficit Procedure (“EDP”), where member states have two weeks to decide if an EDP should be implemented and if so, fines may result if Italy continues to defy EU budget rules.
- Italy’s deputy prime minister noted the country’s 2.4% deficit target is non-negotiable but said the government would be amenable to other changes.
- Italian equities held steady as 10-year bond yields dropped nearly 16bps on the back of the government’s willingness to work on some of its proposals.

Key data/events this week: