Optimism Springs Markets

February 15th, 2019

The Dow made it eight for eight – with the Dow Jones Industrial Average posting its eighth, consecutive weekly gain on a string of positive headlines. A last-minute deal to avoid a government shutdown, keeping the government funded through September 30th, along with continued talks with Beijing aimed at securing a trade pact, managed to fuel an overall bullish bias on the Street. Strong economic reports also gave an additional boost with China’s trade data painting a brighter outlook on international trade while U.S. consumer and producer price data showed that inflation remains subdued. These positive headlines offset a terribly weak December retail sales report. Investors were quick to dismiss the report believing it conflicted with other reports that have recently shown healthy consumer spending. For the week, the Dow added a whopping 3.09%.

China Trade Beats Expectations

This year’s Chinese trade data had been painting a gloomy picture for 2019’s global economic growth outlook, but this week’s most recent report provided glimpses that things may just be turning around. China’s dollar-denominated exports rose 9.10% from a year ago, beating estimates for a -3.20% decline. Imports, although down -1.50%, also beat forecasts for a -10% decline. Meanwhile, the country’s overall trade surplus was $39.16 billion in January, topping estimates of $33.5 billion. China’s trade report also gave Washington something to cheer about, showing that the Chinese surplus with the U.S. fell to $27.3 billion in January, down from $29.87 billion in December. The decline in the U.S-China trade surplus, along with the threat of even higher and broader tariffs, should serve as a powerful motivator for the on-going trade negotiations as both sides race to strike a deal before the March 1 deadline.

Steady as They Go

For the third consecutive month, U.S. consumer prices held steady in January as a decline in energy prices helped to offset increases in the cost of food and rents. During the 12-month period ending in January, overall consumer prices rose a mere 1.60%, their smallest gain since June 2017. This was a deceleration from the 1.90% year-over-year (yoy) increase observed in December. Excluding volatile food and energy components, core consumer prices rose 0.20% in January, while increasing 2.20% yoy. On the producers’ side, businesses benefited from a decline in energy prices which helped drive U.S. producer prices down -0.10% in January, while on a year-over-year basis, producer prices rose 2.00%. That was down considerably from the 2.50% increase in December. Core producer prices, which exclude volatile food, energy, and trade services, remained unchanged relative to December and increased 2.50% yoy. Inflation, which had been a closely monitored item for the Fed during 2018, has clearly weakened over the last quarter. This, in turn, has reduced the urgency to continue raising rates, which markets have cheered.

Markets Dismiss Retail Sales Report

Retail sales missed their mark badly in December, falling -1.20% for the month. That was the biggest drop in nine years. The news shocked economists which had penciled in a 0.20% gain. The miss was so big that not only economists, but the Street questioned the accuracy of the report. Analysts in particular zeroed in on the -3.90% drop in online and mail-order retail sales. This was the biggest drop in that category since November 2008. Those results directly conflict with Mastercard’s SpendingPulse, a report which provides insights into overall retail spending trends across all payment types, including cash and check. December’s SpendingPulse report showed overall holiday sales rose 5.10% from Nov. 1 to Dec. 26, the best reading in six years, while online sales rose 19.10%! Considering the Census Bureau was furloughed as part of the government shutdown and has only been back at work recently with a compressed timeline to produce the retail sales report, it would come as no surprise if the January sales report shows a sharp revision to December’s results. Markets seemed to agree with this conclusion, rallying strongly after the initial weak report.

Markets managed to put an exclamation mark on their respective rallies this week, boosted by data that continues to reflect a still strong US economy. This is the same theme that has been in place for nearly ten weeks, so not much new can be said or offered in that respect. It is just the same story with new data. Relative to the concerns in the 4th quarter, there is comfort for investors in seeing the consistency in each week’s reports and data, and there is now a strong bias of optimism in markets. This, however, is strongly tethered to the belief there will be a successful resolution to the Chinese trade conflict by March 1st, which is just around the corner.

The Week Ahead

Our office will be closed on Monday, February 18th in observance of Presidents Day. The holiday shortened week makes it a light week for economic news with existing home sales and durable goods the highlights of the week.

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