Weekly Economic Update

Economic Update 12-18-2017

  • Economic activity for the week centered on the Federal Reserve, which raised short-term interest rates another quarter-percent, as expected.  Retail sales gained more sharply than expected, while industrial results were mixed and inflation came in weaker than consensus though several measures.  Labor force gains remain robust.
  • U.S. equities gain for the week, with positive sentiment related to tax reform.  Foreign markets were mixed on net, falling behind U.S. stocks for the week with little change in the dollar.  Bonds on net made slight gains, with the treasury yield curve flattening further.  Commodities were generally little changed with crude oil experiencing a quieter week.

U.S. stocks experienced strong gains for the week, despite some volatility mid-week as tax reform legislation made its way through Congressional committees, being held up by final demands, but ended closer to final passage and the President’s signature—far sooner than expected.  Debate continues about the quality of the bill and benefits for personal taxpayers, but corporate tax rates are expected to be brought down dramatically, which has been the key driver behind market optimism.  From a sector standpoint, telecom and technology stocks led the way with gains well over a percent, followed by health care and consumer staples.  Utilities and materials lagged with losses for the week.

Foreign markets gained slightly, to a far lesser degree than domestic stocks, with U.K. and emerging markets gaining, Japan flattish, while Europe pared back a bit on the week.  Europe continued to be affected by U.S. tax reform negotiations, as well as index reconfigurations and options expiration activity.  The ECB and Bank of England also met last week and decided on no changes to their respective interest rate policies; however, narrative from both central banks struck a continued optimistic tone.  In emerging markets, Russian equities gained sharply as their central bank cut rates by a half-percent to 7.75%, to spur economic growth partially due to contained crude oil prices, revenues related to which represent a substantial budgetary input.

Interestingly, the BOE finds itself in a more unique position among central banks as of late in that U.K. inflation has moved above their targeted range, to +3.1% on a year-over-year basis.  Some of this can possibly be blamed on weakness in the pound while Brexit fears were at their strongest a year ago (a weak currency raises the price of imports, which can ‘import’ inflation along with it); however, the pound has since recovered a bit since that time.  U.K. bonds continue to offer negative after-inflation real yields, so this recent spike inflation isn’t expected to be permanent.

U.S. bonds fared decently with minor gains, as the yield curve again flattened further—short rates rose in keeping with Fed movements and several hikes expected next year, while longer rates fell due to lower inflation readings.  Investment-grade credit fared better, as yield spreads continued to fall, while bank loans and high yield lost a bit for the week.  The ‘10 minus 2’ year treasury differential, an often-reviewed measure of yield curve shape, declined to 0.51%.  The November differential of 0.65% was the flattest since Oct. 2007, although that occurred during a normalizing of the yield curve wider from negative levels (which preceded a recession) in early 2007.  Interestingly, yield slopes were near this level for much of the latter 1990s, so curve relationships can be very time-dependent.

Foreign bonds were flattish with minimal impact from a little-changed U.S. dollar.  U.K. bonds rallied with rates there falling somewhat, while debt in emerging market regions performed similarly to that of developed nations.

Real estate securities gained over a percent on the week in Asia and the U.S., outperforming other equity assets, while European REITs were flat.  Domestically, retail and regional malls continued to bounce back with multi-percent gains on the back of stronger-than-expected sales numbers for the holiday shopping season.  Apartments trailed with small losses, per recent trend, as residential supply is rising to meeting demand—putting a damper on future expectations.

Commodities were little changed on the week, with more extreme readings from a variety of subcomponents netting each other out.  Crude oil was little changed for the week, down a few cents to $57.33, natural gas prices plummeted due to continued expectations for a warmer-than-expected coming winter season and ample inventory, while industrial metals again experienced gains.

 

 

Period ending 12/15/2017 1 Week (%) YTD (%)
DJIA 1.34 27.75
S&P 500 0.95 21.86
Russell 2000 0.61 14.17
MSCI-EAFE 0.14 22.34
MSCI-EM 0.70 29.72
BlmbgBarcl U.S. Aggregate 0.29 3.64

 

U.S. Treasury Yields 3 Mo. 2 Yr. 5 Yr. 10 Yr. 30 Yr.
12/31/2016 0.51 1.20 1.93 2.45 3.06
12/8/2017 1.28 1.80 2.14 2.38 2.77
12/15/2017 1.31 1.84 2.16 2.35 2.68

 

 

 

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                               

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. 

 

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