Weekly Update 9/21/2018 – Dow Catches Up With its Peers

US: S&P 500 Index +0.85%, Dow +2.25%, Nasdaq -0.29%
Europe: STOXX Europe 600 +1.70%, German DAX +2.53% France CAC 40 +2.65%, U.K. FTSE 100 +2.55%
Asia: Japan Nikkei +3.36%, China Shanghai Composite +4.32%, Korea KOSPI  +0.90%
Rates/Commodities: 10-Year Treasury yield +7 basis points to 3.06%, WTI crude oil +1.86%, COMEX gold +0.10%

Traders followed the path of least resistance this week, pushing risk assets higher and U.S. Treasuries lower (yields higher) despite another round of tariff announcements in the U.S.-China trade spat, no progress in NAFTA negotiations between the U.S. and Canada, and mixed economic data.

Markets slipped on Monday ahead of the expected announcement from President Trump that another $200 billion in Chinese imports will be subject to import levies starting Monday; but the lower-than-anticipated tax rate, coupled with China’s lessoning ability to reciprocate and comments from U.S. officials that they would welcome serious trade talks, spurred some optimism that carried through the remainder of the week. Along the way, the Dow finally joined its index peers in record territory, snapping a 237-day drought. On the Dow’s new high, LPL Chief Investment Strategist John Lynch noted “The Dow has lagged the S&P 500 Index, the Nasdaq Composite, and the Russell 2000 this year amid escalating trade tensions, which have weighed on shares of larger, multinational U.S. companies. However, we’re not surprised to see it catch up since more than half of the index is comprised of our top sector picks: industrials, technology, and financials.”

On the economic front, housing market data continue to provide mixed signals on the state of the industry as building permits and existing home sales declined year over year, while new housing starts were up nearly 10% from a year ago. Business manufacturing indexes out of the Philadelphia and New York Federal Reserve banks moved in opposite directions, though both readings were consistent with continued economic growth. The Leading Economic Index, a gauge of 10 forward-looking business cycle indicators, dipped from the prior reading but suggested 3% economic growth over the balance of the year remains likely.

Elsewhere, the dollar fell versus its major peers for a second straight week, providing some support for commodity prices, which were led higher by industrial metals such as copper. The yield on the benchmark 10-year Treasury note held above 3% and provided some reprieve for investors concerned about a potential yield curve inversion, a situation where longer-term interest rates fall below shorter-term rates that has historically been a precursor to U.S. recessions.

Overseas, regional equity indexes outperformed their domestic counterparts despite continued political tensions and lackluster economic data that included worse-than-expected manufacturing reports out of several countries, including Germany, France, the Eurozone, and Japan. The U.S.-China trade headlines were in focus, though regional politics also garnered the spotlight in Europe with a series of Brexit negotiations failing to move the UK closer to succession from the European Union. Italy, also in the midst of political turbulence, continued to seek compromise within its government ranks as officials attempted to reassure markets that the country intends to reign in government spending with the forthcoming budget. In Asia, China’s Shanghai Composite surged more than 4% this week after investors viewed the new tariffs as less drastic than initially feared. Comments from Chinese officials that the government would not resort to devaluing the yuan also helped pacify markets. Japanese stocks also outperformed in the region as the Nikkei rose every day this week, getting a boost from Prime Minister Shinzo Abe’s re-election victory that solidifies his role until 2021, as well as the status-quo outcome of the Bank of Japan’s monetary policy meeting.

The Fed’s monetary policy meeting (rate hike expected) highlights the week ahead, but we’ll also get a series of top-tier data out of the U.S., including consumer confidence, second-quarter gross domestic product (third revision), and the Fed’s preferred inflation measure: core personal consumption expenditures. The overseas docket is relatively light, with Eurozone consumer inflation, producer price levels in Japan, and Purchasing Managers’ Index data out of China likely to garner attention. Track these and other important events on our Weekly Global Economic & Policy Calendar.

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