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Week in Review

Week Ending: Friday, May 4, 2018

Recap & Commentary

The S&P 500 posted flat performance on the week despite the continuance of volatile intraday market moves. The price action was driven by investor optimism about strong Q1 earnings and improving economic growth, as well as concerns about global trade relations and rising interest rates.

On the earnings front, through Friday, 81% of S&P 500 companies had reported earnings.  To date, 78% of companies have beaten their earnings estimate while 77% have beaten their revenue estimate.  Currently, top-line growth is tracking at 8.5%, pointing to strong underlying economic demand.

Regarding trade, investors worried about the deadline for temporary exemptions on recently enacted aluminum and steel tariffs, as well as the outcome of trade discussions between the US and China. Canada, Mexico, and the EU were all granted 30-day extensions to allow for further negotiations. Trade discussions between the US and China ended with little discernable progress. Further, China has completely cut off purchases of US soybeans, one of its politically sensitive tariff targets, in retaliation against US tariffs.

On Wednesday, the Fed left rates unchanged but reiterated plans to continue raising them gradually in response to firming inflation. Markets continue to worry about the possibility of the Fed raising rates faster than expected.

Economic Bullet Points

The nation’s factory sector appears to be gaining momentum albeit in an uneven environment. The ISM Manufacturing Index headline remains relatively high, but signs of stress in details behind the headline are becoming more apparent. Factory Orders beat expectations, up strongly in both February and March, led by gains for durable goods. An important positive in the month was a rise in backlog orders, pointing to strength ahead and the potential for the sector to be an overall contributor.

Data outside of the factory sector was mixed. April’s ISM Non-Manufacturing report was one of the strongest small-sample surveys on the economic calendar. New orders remain exceptionally strong and delivery times are extended, evidence of pressure on shipping. The housing sector created weakness in the Construction Spending report, both single- and multi-family homes down in the month. This data is known for its volatility, however, which limits the surprise. The International Trade deficit fell sharply in the month as exports rose 2.0% while imports fell -1.8%.

Personal Income & Outlays: Core inflation, as measured by core PCE, is nearing the Fed’s 2% target at 1.9%, Y/Y. The monthly gain for core PCE was more modest. Consumer spending rose as expected, and strength in spending on durables more than offset weakness in spending on non-durables. Income data was more subdued, well below the pace of the prior four months.

The labor market continues to tighten, as indicated by the Employment Situation report, where nonfarm payrolls rose on the lower side of expectations, but revisions to the prior two months made up the difference. The unemployment rate fell to 3.9% and, though the labor force participation rate ticked downward, it doesn’t seem that employers are having to pay more to attract workers. Average hourly earnings just inched higher but were still below expectations. Jobless Claims remained at a 49-year low.

Of Note

Last week, the current bull market became the 2nd longest expansion on record.

Market Indices Week of 5/4

S&P 500                         -0.2%

Russell 2000                  0.6%

MSCI EAFE                    -0.6%

MSCI EM                         -1.7%

Commodities                 0.7%

Barclay’s Agg.                0.0%

US Dollar Index               1.1%

10-Yr Yield                     2.94%

WTI Oil ($/bl)                    $70

Gold ($/oz)                     $1,167

The Week Ahead

  • NFIB Small Bus. Optimism
  • Producer Price Index
  • Consumer Price Index
  • Consumer Sentiment
  • Jobless Claims

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