Dow Retakes 26K on Trade Deal Hopes

February 22, 2019

The Dow Jones Industrial Average kept its winning streak alive, up for the ninth consecutive week. Hopes for a U.S.-China trade deal fueled the market’s move higher as the two concluded another week of trade talks on Friday. Also adding to the positive sentiment on the Street was the Federal Reserve’s Open Market Committee (FOMC) meeting minutes, which showed the Fed not only maintaining its slow and gradual interest rate hike path, but also tipping its hat towards ending the reduction of its $4 trillion asset portfolio. Those positive developments helped to more than offset weak economic reports on durable goods and existing home sales. For the week, the Dow 30 climbed 0.57%.

Fed Set to End Portfolio Unwinding

The Fed’s FOMC minutes showed the central bank would pause its slow and gradual interest rate hikes as it continues to monitor downside risks to the U.S. economy. High on the central bank’s risk radar is the global economic slowdown, particularly in China and Europe, waning fiscal stimulus from the Trump tax cuts, and tighter financial conditions after four interest rate hikes last year. Although the markets for some time have been pricing in no additional interest rate hikes due to these heightened risks, investors remained concerned that financial conditions would remain tight as long as the central bank continued to reduce its bond portfolio. In a nod to those concerns, policymakers indicated they are considering ending the shrinking of its portfolio later this year. An action plan remains in the works, with a formal announcement expected to be made in the coming months.

Markets Dismiss Durable Goods Orders

With the Commerce Department back to business after the federal government’s 35-day shutdown, investors were finally able to pour through December’s durable goods report. Durable goods ranging from toasters to aircraft – goods that are meant to last three years or more – rose 1.20% in December. A rise in orders for aircraft and autos helped push orders higher for the month. Core capital goods, which are considered a proxy for business spending fell -0.70% however, missing estimates of a 0.20% gain. The slide in core capital goods was due mainly to a decline in demand for machinery and primary metals. The dip in business spending in durable goods corresponds to a similar dip in the ISM’s manufacturing report in December. January’s ISM report showed that manufacturing rebounded strongly from December, so markets were quick to chalk up the durable goods report as simply old news. Next week should give us a better read into current conditions as the ISM is set to release its February report on manufacturing.

Existing Home Sales Poised for a Comeback

Existing home sales remained in their months long slump, down -1.20% in January to a seasonally adjusted annual rate of 4.94 million units. The rise in mortgage rates and the rise in the cost of land have contributed to the slowdown in existing home sales by keeping inventory tight and hindering affordability. Some relief could be in sight for potential homebuyers as we near the spring buying season. The Fed’s pause on interest rates and concerns over slowing economic growth have helped push thirty-year mortgage rates to a one-year low of 4.35%. Housing supply, which stood at 3.7 months in December, ticked up to 3.9 months in January which should help ease price growth. Lower mortgage rates and more supply – combined with a strong jobs market and growing wages – should help boost activity as we enter the busy home-buying season.

As has been the case for recent weeks, hopes for a U.S.-China trade deal continued to be the driving force behind the market’s momentum. Although this week’s economic reports showed some weakness, there has been inconsistency in manufacturing and retail sales data recently due to both the government shutdown and some behavioral oddities at the end of the year due to the market’s volatility. Weaker December figures have generally been parried by stronger January figures, which is the reason investors have taken a wait and see approach to this week’s durable goods report. The trend for the U.S. economy for time being remains fairly positive, and the markets saw it as such this week.

The Week Ahead

After being furloughed as part of the federal government shutdown, the Bureau of Economic Analysis releases its first read on Q4 2018 GDP. We’ll also have the latest figures on U.S. and China manufacturing.

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