Market in a Minute: Oct 29 - Nov 2, 2018
by Rich & Sheila Jamison
Global equities staged a rebound effort last week, clawing back some of the losses posted during a volatile October. Largely upbeat earnings and easing China trade tension reports (some unsubstantiated) underpinned the rally.
The 10-year US Treasury yield rose to 3.21%, helped in part by Friday's upbeat employment data. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), fell to 19.6 from nearly 26 a week ago. The price of a barrel of West Texas Intermediate crude oil extended its losses, falling to a seven-month low of $63.35 on rising global inventories.
October nonfarm payrolls rose a more-than-expected 250,000. Unemployment held steady at a nearly 50-year low of 3.7%. Average hourly earnings rose 0.2% month-over-month or 3.1% year-over-year, the most since 2009. Strong labor data parallels a consumer confidence jump to its highest level in 18 years. The key takeaway: these trends will likely keep the Fed on its planned rate hike path.
Last week’s market action around the China trade issue gives us insight into how threatening the market sees tariffs. Thursday, President Trump tweeted he had a "long and very good conversation" with Chinese president Xi Jinping and that trade discussions are progressing nicely. That tweet raised hopes for breaking the trade impasse, which has been weighing on financial markets in both countries. Markets rallied on the news. Hopes were raised further on Friday. Bloomberg News reported Trump hopes to reach an agreement when he meets with Xi later this month and had instructed his cabinet to draft a potential deal. The market rallied. Conflicting reports surfaced later. Larry Kudlow, a member of Trump’s economic advisory council, said that no such instructions had been given. The market rally reversed with all the indexes falling significantly into the red.
With Q3 results in for about three-quarters of the S&P 500 companies, blended earnings-per-share growth is running at nearly 25%. This matches the extraordinary pace of 2018’s first two quarters. Revenue growth has moderated slightly, running at an 8.5% year over year, down from last quarter's 10% growth. Profit margins, however, are running at a 12% rate, a record.
England and Japan’s central banks both held interest rates unchanged. The Bank of England signaled UK rates could be raised more quickly if a deal is reached for an orderly exit from the European Union. It said the British economy is operating at full capacity while inflation is above target.
In contrast, Q3 European economic growth slipped to just a 1.7% annual growth rate, well below both expectations and Q2’s 2.2%. The rate peaked at 2.8% in mid-2017 and has been declining for the last four quarters.
Italian growth stopped in Q3 amid its ongoing battle with the EU over Italy's proposed 2019 budget. The EU rejects that budget, dubbing it “unsustainable” because of Italy's high debt-to-GDP ratio.
Asian growth is also slowing. Growth in China, though still strong compared to other countries, continues to deteriorate. A deepening trade war tighter global financial conditions and a slowdown in global growth all weigh on China. The government announced another package of targeted stimulus measures last week to try to prop up demand and counter the cyclical downturn.
Data from South Korea and Taiwan, both important parts of China's supply chain, showed that they, too, have been caught in the regional downdraft. Industrial production figures and purchasing managers' indices released last week pointed to slower growth amid flagging global demand.
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