Market Update: Thurs, Feb 21, 2019 | LPL Financial Research

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Daily Insights

Disappointing overseas manufacturing, trade data. Global economic data continues to slide amid waning demand. Markit’s Eurozone Purchasing Managers’ Index (PMI) slid to 49.2 this month, the first time manufacturing activity in the region has fallen into contractionary territory (below 50) in five years. Markit and Nikkei’s Japan manufacturing PMI also slid to the lowest in more than two years. Separate data showed Japanese exports declined 8.4% year over year in January. Exports to China were particularly weak, falling 17.4% year over year. We continue to expect economic and earnings growth in foreign developed markets to trail those of the U.S. and emerging markets (EM), and we continue to prefer exposure to U.S. and EM equities over developed international stocks.

Fed minutes address balance sheet normalization plans, but questions remain. Minutes from the Federal Reserve’s (Fed) most recent monetary policy meeting, released yesterday, showed near-unanimous support for halting the wind-down of its ~$4.5 trillion balance sheet, which ballooned from less than $1 trillion before the Fed implemented its first round of quantitative easing post-Financial Crisis. The Treasury yield curve, measure by the difference between 2- and 10-year yields, steepened following the release, while the U.S. dollar strengthened. Still, questions remain about the intended terminal size of the balance sheet, the final composition of assets, and whether it will gradually reduce its current $50 billion/month runoff or abruptly halt it. Fed Chairman Jerome Powell should be able to provide more insights when he testifies before congress next week.

Capex cools in December. Corporate demand weakened through the end of 2018, according to this morning’s durable goods report. New orders of nondefense capital goods (ex-aircraft), our best proxy for capital expenditures (capex), unexpectedly fell 0.7% in the month. Higher business spending is an important part of our 2019 economic forecast, and one of the primary reasons why we lowered our gross domestic product expectations this year. We still believe stronger growth in business spending may drive this leg of the economic expansion, as higher investment leads to greater worker productivity and profit growth. However, spending growth may be relatively muted until the trade dispute is resolved.

Market breadth continues to improve. One of our favorite technical indicators is overall market breadth, meaning how many stocks are participating in a move. The good news? We are seeing plenty of stocks participate in this recent rally, which bodes well for continued longer-term strength. Today on the LPL Research blog we will take a closer look at various advance/decline (AD) lines making new all-time highs and why that could be a sign for stock prices to eventually move back to new highs as well.

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Thursday

  • Initial Jobless Claims (Feb 16)
  • Durable Goods Orders (Preliminary Dec)
  • Markit US Manufacturing PMI (Preliminary Feb)
  • Markit US Services PMI (Preliminary Feb)
  • Markit US Composite PMI (Preliminary Feb)
  • Leading Index (Jan)
  • Existing Home Sales (Jan)
  • Germany CPI Report (Jan)
  • Markit Eurozone Manufacturing PMI (Preliminary Feb)
  • Japan CPI Report (Jan)

Friday

  • Germany GDP Report (Q4 2018)
  • Eurozone CPI Report (Jan)

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Index data obtained via FactSet

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