December 7th, 2018
Initial optimism for a trade deal between the U.S. and China following last week’s declared cease-fire following the G-20 summit faded quickly once the parties returned home. Headlines following Trump and Xi’s dinner suggested the parties had agreed to a 90-day window to hammer out a comprehensive agreement, but by week’s end it was unclear if either party truly understood what the other party agreed to when they announced the so-called breakthrough. Throwing a political wrench into negotiations was news on Thursday that Canada, at the request of the U.S., had arrested Huawei’s Chief Financial Officer (CFO) on charges of violating US sanctions against Iran. Huawei is one of China’s marquee tech companies, and the executive’s arrest is sure to sour any goodwill that may have developed between the parties at the G-20 summit. With investors focused on China, trade, and the inversion of the yield curve, investors didn’t pay much attention to this week’s jobs and manufacturing numbers and the Dow managed to tumble -4.50% for the week.
Jobs Miss as Wages Rise
Businesses added 155,000 to the payrolls in November, missing estimates of 198,000 jobs. Meanwhile, the unemployment rate held steady at 3.70%, its lowest level since 1969. The all-important wage growth number showed average hourly earnings rose 3.10% year-over-year in November for the second consecutive month, bringing the average year-to-date wage growth figure to 2.80%. Jobs growth in November was skewed towards service-related industries, which added 132,000 to the payrolls, while goods producers added 29,000 to the payrolls, their lowest increase since March. Healthcare and professional business services each added 32,000 to the payrolls. Manufacturing rose by 27,000, while transportation and warehousing contributed 25,000, indicating that tariffs have not been a death knell to these industries as many had feared. Retail, which historically adds a large number of seasonal workers during this holiday season, only saw payrolls increase by 18,000 as fewer retail workers were needed by brick-and-mortar stores now that shoppers are increasingly moving their purchases online. Markets initially rallied on the weaker than expected report, believing it pointed towards a slowdown in the jobs market that would halt the Fed’s rate hikes, but that still seems like only an outside possibility for December’s meeting. This year’s jobs gains have averaged 206,000 per month in a labor market that was already tight, and while the Fed is providing some dovish guidance, a pause would be unusual given how committed the Fed seemed to be just a month ago.
Manufacturing Floors Still Humming Despite Trade Tensions
U.S. manufacturing remains on a positive trend. According to the Institute for Supply Management (ISM), the Purchasing Manufacturing Index rose to 59.3 in November from 57.7 in October. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. New orders and production increased to 62.1 and 60.6, respectively. Despite retaliatory trade tariffs on U.S. goods, new export orders remained healthy, holding steady at 52.2. Imports, on the other hand, slowed during the month, falling to 53.6 from 54.3 in October. Tariffs remain top of mind for the survey’s respondents, but so far the manufacturing sector remains healthy, boosted by strong domestic demand.
It was another volatile week for markets dominated by news over trade and the Fed. The Dow climbed on Monday on the back of the positive indications from Trump/Xi’s meeting, but then fell nearly -800 points on Tuesday when those hopes were dashed over the ambiguity of what exactly had been agreed upon. Markets were closed on Wednesday for President George H. W. Bush’s funeral, but the Dow plunged -785 points when markets re-opened Thursday on the news of Huawei’s CFO’s arrest. The Dow did, however, manage to stage a late day rally to finish off only -79 points for the day, rebounding on Fed President Raphael Bostic’s accommodative statements. Friday started out positive on the weaker than expected jobs report, but the wheels came off as White House officials continued to play good cop/bad cop by hitting the airwaves and sending mixed signals on the Administration’s position on China. In the background, the arrest of one of China’s most visible executives has cast a long shadow over the prospects of anything material being accomplished during the 90-day truce.
While all the trade drama and Fed watching was playing out, the yield curve managed to officially invert – meaning that yields on certain short-term Treasuries exceed those of longer date maturities. The shape of the yield curve is a technical indicator of sorts, and the inversion is unusual because under normal circumstances investors should expect higher interest rates on longer dated bonds versus shorter dated bonds. When inversions have occurred in the past, they’ve been a pretty good warning that a recession lies ahead- albeit this typically take 12-24 months to happen. The data this week should have been soothing to investors. They were strong enough numbers to show we are not in a recession but contained some weakness to perhaps handcuff the Fed on raising rates, but the swirling trade narrative, contradictions, and general lack of consistency from China, the White House, and the Fed ultimately made it a very tough week for investors.
The Week Ahead
Bravo to the Bears
Ana is responsible for managing the workplace retirement plans that Probity offers businesses. This includes conducting research into a wide range of investment products that are available to thousands of employees who participate in the 401(k) plans Probity manages. She also provides businesses with quarterly and annual plan reporting on their and implements fund and model changes as necessary based on fluctuating market conditions and the needs of plan sponsors and their employee participants. In addition to her 401(k) responsibilities, Ana manages Probity’s portfolio models on behalf of individual investors and is a member of Probity’s Investment Committee which provides both structure and a formal process for overseeing and managing the firm’s investment activities.
Outside of work, Ana enjoys boxing and has a killer right hook. She is a huge college football fan, and her favorite team is the University of Texas Longhorns. Hook ’em Horns!
In celebration of Ana’s ten-year service anniversary, our office assembled two teams: the Bulls versus the Bears, and battled it out in a game of paintball. We discovered that we are all pretty competitive, and yes, it does hurt to get hit by a paintball. Despite a few falls, some minor injuries, including a bruised ego or two, and even a bit of accidental friendly fire, we all managed to walk away largely unscathed albeit very wet and muddy from yesterday’s rain. In case anyone is wondering, the Bears outgunned the Bulls.
Please join us in congratulating Ana for her decade of outstanding service to Probity Advisors, Inc. and to all of our clients. Feel free to peruse our collection of action shots below from yesterday’s shoot out.