MCF Weekly Capital Market Review - November 18th, 2019
As we approach the end of US earnings season, earnings beats have outnumbered misses 2 to 1.[1] Large and mid-cap stock indices were positive for the week although small caps and emerging markets were down. Future market disruption could stem from several uncertainties, especially trade policy and the impeachment inquiry against Trump. However, the public does not appear convinced of a successful removal; the betting odds of Trump leaving office before the end of his first term sit at 21%, unmoved from the day after the impeachment inquiry was first announced.[2]
Germany had a positive surprise with Q3 GDP coming in at 0.1% v. the expected -0.1%.[3] Although growth for the quarter allows Germany to escape the technical definition of recession (two consecutive quarters of negative GDP growth), 0.1% growth provides little comfort. The news is reflective of other European states – stalling economic growth. This isn’t just a European phenomenon, but rather a global one. China industrial output, retail sales, and fixed asset investment growth all fell short of October expectations.[4] China began slowing down before the trade war escalation with the US, although it certainly provides a headwind against economic growth. India faces an even sharper slowdown, with the World Bank cutting 2019 GDP growth expectations from 7% back in April down to 5.9% last month.[5]
Investor optimism appears to be waning as we approach 2020. In the US, some point to the August yield curve inversion as setting an expiration date on the current expansion. Some point to the unprecedented age of it, over 10 years and running. There are also several disruptors, from growing worldwide populism to protests. However, there are some reasons for optimism. Monetary policy worldwide has been mostly supportive of continuing economic expansion. Fundamental readings in the US, especially in labor, consumer spending, and confidence, remain strong despite weakness in manufacturing and inflation.
Year-over-year CPI showed an increase of 1.8%, largely due to higher energy and healthcare prices. Year-over-year PPI reversed last month’s softness with October hitting 1.1% in a nod to increasing inflation. Powell’s speech confirmed market expectations by saying that current monetary policy remains appropriate, interpreted as no more rate changes are foreseen (and markets agree through 2020[6]). Retail sales were positive, hitting upper-end consensus estimates.
This week will feature releases on existing home sales and housing starts, Fed minutes from last month, business outlook survey, and consumer sentiment.
INDEX RETURNS
[4] https://www.reuters.com/article/us-china-economy-activity/china-oct-industrial-output-up-4-7-y-y-investment-growth-hits-record-low-idUSKBN1XO078
[5] https://www.bloomberg.com/news/articles/2019-10-13/world-bank-says-india-faces-severe-slowdown-cuts-gdp-forecast
[6] https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
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REFLECTED INDICES
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