Another big reversal off the lows. The S&P 500 Index once again found support near the bottom end of its recent range, this time bouncing significantly off the intraday lows. At its low’s, the S&P 500 was down 1.9%, but managed to finish in the green. You have to go back to February 6th the last time that happened. This comes on the heels of last Thursday, when the S&P 500 bounced nearly 3% off of the intraday lows – the largest intraday reversal since February 9. Don’t forget, February 9 was also the intraday low for 2018. Bottoms are a process and we are encouraged by these reversals off of support.
Bonds have done their job. Over the past month while the S&P 500 Index has lost 5% on a total return basis, Treasuries have gained 2% based on the broad Bloomberg Barclays Treasuries Index. Does that mean sell stocks and buy Treasuries? We don’t think so. However, this latest performance does underscore the value of moving up in quality with fixed income allocations at this stage of the business cycle as we have suggested for suitable investors.*
Despite the latest rally, we still see long rates going higher. We would not chase Treasuries here even though we believe shoring up quality of fixed income portfolios makes sense at this point. Given our expectations for economic growth, inflation and Federal Reserve (Fed) policy going forward, we think rates go higher from here. We continue to see 3.25% at a reasonable near term target to the upside, with potentially an additional 0.25% to 0.5% of upside in 2019. From a technical analysis perspective, we believe the odds favor the 2.80% support level on the 10-year Treasury yield holding in the near term.
Renewed trade talks off to promising start. Following a phone call between U.S. and Chinese officials to kick off the latest round of trade negotiations, President Trump announced that Beijing has “agreed to reduce and remove tariffs on cars coming into China from the U.S. Currently the tariff is 40%.” Also reportedly discussed on the call were China’s purchases of agricultural products, as well as changes to fundamental Chinese economic policies. Further details were not made available, but the developments are an excellent sign of progress.
U.K. PM making the rounds (again) after canceling Brexit vote. British Prime Minister Theresa May is traveling around Europe today as she meets with key officials in search of tweaks to the deal for which yesterday’s vote was postponed. However, European Commission president Jean-Claude Junker indicated the European Union is willing to give the U.K. further clarifications on Brexit but will not renegotiate the treaty. A “no-deal” result, where the U.K. still leaves the European Union but without terms in place, is an outcome that would be very messy and desired by almost no one; however, the odds are increasing.
Small business optimism dips as producer prices rise. Data out this morning showed that the NFIB Small Business Index declined month over month (MoM) but remains elevated. A tight labor market was among the top reasons for tempered optimism that helped push the percentage of employers planning to raise wages to near 30-year highs. Employers’ expectations to increase compensation comes as the Producer Price Index (PPI) ticked up 0.1% MoM in November but was down sharply from October’s 0.6% increase thanks to falling gas prices. Excluding food and energy, the core PPI was up 0.3% MoM, and 2.7% YoY, declining from the prior month and providing some additional support for the market’s signals that the Federal Reserve should slow its pace of hikes.
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- CPI Report (MoM, Nov)
- Eurozone Industrial Production (Oct)
- Eurozone Employment Report (Q3)
- Initial Jobless Claims (Dec. 8); LP: 234K
- European Central Bank Rate Decision
- Nikkei Japan Manufacturing PMI (Preliminary, Dec)
- Japan Industrial Production (Oct)
- China Retail Sales (Nov)
- China Industrial Production (Nov)
- Retail Sales (MoM, Nov)
- Industrial Production (MoM, Nov)
- Markit US Services PMI (Preliminary, Dec)
- Markit US Manufacturing PMI (Preliminary, Dec)
- Markit Eurozone Manufacturing PMI (Preliminary, Dec)
*For further disclosure, please see the Midyear Outlook 2018: The Plot Thickens publication
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Index data obtained via FactSet
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