Monday Market Review December 9, 2019
Economic data for the week included a sharply better than expected employment report for November, as well as stronger consumer sentiment, yet weaker readings for both ISM manufacturing and services data, although the latter survey remained in expansion.
U.S. and foreign equity markets both gained, as trade optimism and economic results outweighed early pessimism. Likewise, interest rates rose, which punished government bonds but rewarded credit. Commodities gained as OPEC production cuts buoyed crude oil prices sharply last week.
Equities were mixed to slightly positive last week, as due to conflicting sentiment. Early in the week, U.S. stocks weakened due to Presidential comments that a trade deal might not be struck until next year or even after the election, which disappointed those wanting a deal before year-end. Mid-week, however, hopes had turned more optimistic, with talks described as going ‘very well’, and a positive jobs report on Friday certainly turned sentiment around. From a sector standpoint, energy and consumer staples led, with gains of a percent or more, while industrials and consumer discretionary stocks suffered with losses of a similar magnitude, with weakness in several transportation names.
There were also rumblings about tariffs being placed steel and aluminum from Brazil and Argentina, due to extreme currency devaluations in those nations, as well as continued complaints about aircraft part subsidies in Europe. Additionally, tariffs were implemented on just over $2 bil. on specialty French products, such as wine, cheese and handbags, in response to digital taxes the French have implemented that negatively impact the U.S. tech sector.
Results from Black Friday, Cyber Monday, and the start of the Holiday retail shopping season are always under close scrutiny, but especially this year, with questions over economic growth sustainability. According to data from Adobe, online sales are up 20% over last year—to over $7 bil. on Black Friday and $9 on Cyber Monday alone. Despite continual calls for the death of physical shopping, hopes for brick-and-mortar retail sales are also somewhat high, although this channel is seemingly continuing to lose ground to online/smartphone purchases.
Foreign stocks were held back by continued pessimism in economic conditions, as well as lack of progress in trade talks—coupled with the new trade spat between the U.S. and France. However, a weaker dollar helped improve these losses on net for domestic investors. Emerging markets fared well on the week, with economic woes showing some bottoming in key developed markets, stronger commodity prices and an improved trade picture between the U.S. and China, despite new frictions in certain sectors on a one-off basis, such as the U.S. and Brazilian steel producers.
U.S. bond prices declined as the yield curve ‘twisted’, with short rates falling and long rates rising, resulting in a more positive slope. More positive sentiment for risk assets has helped to push rates higher, along with continued implied promises from the Fed that rate cuts are done for the time being—effectively putting a floor on yields to some degree. Credit performed slightly better, with high yield and bank loans earning positive returns, as would be expected when risk is rewarded. Foreign developed market bonds performed similarly to domestic debt in local terms, but were helped by a half-percent decline in the dollar. Emerging markets fared even better, benefitting from risk-taking and improvement in sentiment about U.S.-China trade talks wrapping up.
Real estate declined slightly, with higher rates impacting the group negatively in the U.S., while the weaker dollar helped European REITs gain a percent for the week.
Commodities gained strongly last week, based on results from the energy sector, which more than offset declines in agriculture and precious metals. The price of crude oil rose by a dramatic 7% last week to $59/barrel, based upon news of OPEC cutting production by another 500,000 barrels/day in January (in addition to 1.2 mil/day of cuts from late 2018) in order to sustain oil prices. However, as usual, despite the rhetoric, debate continues about how much production will really be cut. Announcing production cuts accomplishes immediate goals for OPEC—pushing oil prices higher. However, as those prices rise, the incentive for ‘cheating’ (i.e. nations producing more than promised in order to take advantage of higher prices) increases.
(-) The ISM manufacturing index for November fell by -0.2 to 48.1, compared to expectations calling for an increase to 49.2. Under the hood, production and prices paid each rose by several points and remained contractionary, but new orders, employment, and inventories dipped a bit lower, further into contraction. Supplier deliveries, however, rose a few points, back into expansion territory (over 50). This was a disappointment for those hoping manufacturing would re-emerge out of its slow patch, but being a sentiment survey, it’s likely that the U.S.-China trade issue is continuing to weigh on production and spending decisions.
(-) November’s ISM non-manufacturing index for November fell by -0.8 of a point to 53.9, below calls for a flatter 54.5 reading. Within the survey, new orders and employment increased, to levels that are further expansionary. Business activity and supplier deliveries slowed by several points—but also remained in expansion. Net export orders and prices paid both increased even further into expansion, which was a positive. While not a great report on a headline basis, due to the decline and anecdotal responses about the trade woes weighing on sentiment and spending, the underlying data suggests continued expansion of the services sector, which makes up a bulk of the U.S. economy.
(+) The October trade balance figures showed a tightened deficit of -$3.9 bil. to -$47.2 bil., tighter than the median forecast of -$48.5 bil. Imports fell by nearly -2%, led by all areas outside of petroleum, imports for which rose by similar magnitude in the opposite direction. Exports fell slightly on net, with a 4% rise in petroleum exports offset by -1% decline in other goods, such as aircraft engines, pharma, and trade-impacted soybeans. Over the past year, imports are down nearly -5%, while exports have declined over -1%. It’s important to note that U.S. exports have again exceeded imports, due to the impact of fracking volumes, which has certainly begin to change the trade dynamic.
(-) Construction spending fell -0.8% in October, bucking expectations for a 0.4% gain; however, there were revisions for certain prior months that were positive. Public spending ticked down slightly. Private spending in October fell by -1% overall, led by both the non-residential and multi-family segments, while single-family spending continued its recent upward trend.
(+) The preliminary Univ. of Michigan consumer sentiment index for December showed a rise of 2.4 points to a level of 99.2, beating expectations calling for 97.0. Consumer assessments of current conditions rose by nearly 4 points, while expectations for the future rose by about half of that pace. Inflation expectations for the coming year fell a tenth to 2.3%, while those for the next 5-10 years fell -0.2% to the same level, which ties an all-time low for that data point.
(-) The November ADP private sector employment report showed a gain of only 67k, which sharply underperformed relative the prior month as well as expectations calling for 135k. Services jobs increased by 85k, with strength in healthcare/education making up nearly half, while goods-producing jobs fell by -18k to result in the net differential. These were even split between mining, manufacturing and construction. The most interesting part about the report is that it wasn’t segmented by group, but saw widespread weakness across all company sizes, which some economists found more bewildering.
(0) Initial jobless claims for the Nov. 30 ending week fell by -10k to 203k, which was below the median forecast of 215k and the lowest levels in over months. Continuing claims for the Nov. 23 week, on the other hand, rose by 51k to 1.693 mil., which was above expectations calling for 1.660 mil. No anomalies were reported, but seasonal adjustment factors tend to be a culprit this time of year, which can skew the week-to-week numbers dramatically
(+) The employment situation report for November came in far better than expected. While there were some seasonal effects involved, overall, the report pointed to widespread growth, which may serve to keep the Fed’s easing trend contained.
Nonfarm payrolls for the month rose by 266k, far surpassing expectations calling for 180k, and featured positive revisions for several prior months by over 40k. A significant impact, of nearly 45k, came from the resolution of the General Motors strike, although the timing of Thanksgiving and various weather impacts appeared to also play a role. Service jobs rose 206k, led by education/health, as well as business services and leisure/hospitality. Manufacturing jobs rose 54k, led by the above-mentioned strike resolution, while government payrolls also rose.
The unemployment rate ticked down -0.1% on a rounded basis to 3.5%, along with a decrease in labor force participation. The U-6 rate of underemployment fell by a similar rate to 6.9%. The household survey component, showing a household employment gain of 83k.
Average hourly earnings increase by a bit over 0.2% for November, which was a slower pace than the prior month and about a half-percent below expectations. This brought the year-over-year pace down a bit to 3.1%—led by production and non-supervisory employees, where the pace of growth exceeded that of management personnel. Average weekly hours were unchanged at 34.4.