Market in a Minute: October 1-5, 2018
by Rich & Sheila Jamison
Equities, despite dramatic early week run-ups and new highs, ended the week losing (with the DJIA almost flat). Rising treasury yields weighed late week. The US 10-year Treasury note ended the week at 3.23% — the highest level in more than 7 years. WTI Crude oil increased slightly to $74.37 while volatility (using our old friend the VIX) increased to 14.8 from 12.5 the previous Friday.
The week got a running start as Canada joined with Mexico to end re-negotiations with NAFTA 2.0 – actually called “USMCA” for the “US-Mexico-Canada Agreement” – over the previous weekend. (An aside, Rich has been trying to make USMCA fit into the Village People’s hit YMCA all week. If you think squeezing the extra letter into the rhythm is funny, you should see him trying to make an “S” while doing it.) Back on topic, USMCA is not significantly different from the original NAFTA it replaces. It includes revisions of auto manufacturing practices (requiring more vehicles be made in North America) and fewer restrictions on US exports of dairy products to Canada. In exchange for Canada’s concessions on dairy products and passenger vehicles it got a key concession that protects its lumber industry from US-imposed anti-dumping tariffs. USMCA alleviated some of the uncertainty around trade, quenching the US’ threat that it might place tariffs on the auto exports of Mexico and Canada. Though it avoids tariffs, it will make it harder for global automakers to build cars cheaply in Mexico. All three countries are expected to sign the USMCA by the end of November, and the US Congress is expected to vote on it in 2019.
Midweek, we learned that the September ISM (Institute for Supply Management) non-manufacturing index rose to 61.6, its highest level since 2008. Additionally, the ADP number for private sector jobs came in at +230,000, with the services sector contributing most of the increase. These acted as catalysts for the rise of the:
- 30-year Treasury yield to its highest level since late 2014
- 10-year Treasury yield to its highest level since mid-2011, and
- 2-year Treasury yield to its highest level since mid-2008
On Wednesday, the 30-, 10- and 2-year yields began a market-scaring climb to end the day at 3.31%, 3.16% and 2.86%, respectively.
Also on Wednesday, the Senate approved plan to double global infrastructure funding. The measure reauthorized the Federal Aviation Administration for five years in an attempt to counter China's growing influence on major infrastructure and development projects. The new agency would have broad authority to offer countries financing options for such projects, which would put the US in competition with China. The measure came about in response to concerns over the scale of China's goals around restructuring global trade routes.
Friday the government’s September employment situation report disclosed nonfarm payrolls rose by 134,000, less than the anticipated 180,000 and the smallest gain this year. In some industries, hurricane Florence may have affected September’s numbers. However, the Department of Labor could not measure the impact. It’s also worth noting that August’s number was revised up from 201,000 to 270,000. However, September’s unemployment rate fell to 3.7%, down from August’s 3.9% and the lowest since 1969. More disconcerting was wage growth, up by nearly 3% year-over-year, the fastest pace since 2009. The key takeaway from unemployment and wage growth is that a solid labor market could release pent-up wage pressures as employers struggle to find qualified workers. On the other side of the balance, this seems less worrisome when you compare it with historically similar periods of low unemployment.
Italy's government still plans to move ahead with the 2.4% deficit for 2019, pending the approval of European authorities. However, it set 2020 and 2021 budget targets at lower levels than the 2.4% for both years initially planned. The budget-deficit targets for 2020 and 2021 are at 2.1% and 1.8% of GDP, respectively. The lower target levels for 2020 and 2021 suggest that Italy is taking a more practical position after investors began to sell off Italian assets upon news of the government's initial budget plan. Italy is the third largest economy in the Eurozone (behind Germany and France). Currently, Italy's debt stands at around 130% of GDP, the second-highest level in the Eurozone, behind Greece.
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