Stocks rolled over last week, as the S&P 500 fell by 4.60 percent to 2,633.08. That left the benchmark index down 1.52 percent 2018-to-date, and 10.16 percent below the record close hit just a few months ago. The latest drawdown is being blamed primarily on the partial inverting of the yield curve and skepticism about the trade negotiations between the United States and China. The former is widely described in the media as a recessionary precursor, but the lead time has often been so long that its usefulness for timing the market is arguably nonexistent. Moreover, a yield curve inversion (shorter-dated bonds yielding more than longer-dated ones) might have preceded each of the past seven recessions but there have also been notable false positives, e.g. 1966 and 1998.
None of this means that changes in the yield curve should be ignored, but perhaps a better interpretation of the current inversion is that the market has little faith in the Federal Reserve’s forecast for another three interest rate hikes in 2019. In fact, the market-implied odds of there being even one quarter-point increase next year fell below 50 percent last week, and the chances of a rate cut in 2020 actually rose. More importantly, last week’s sharp selloff followed (and essentially erased) the best gain for equity indices in seven years, highlighting just how volatile the price action has become recently. For some perspective, though, 2018 has already seen 16 single-day moves (higher or lower) in the S&P 500 of at least 2 percent. That definitely seems like a lot after 2017, which had zero 2 percent moves, but 2018 still appears like a tranquil period when compared to the 72 1-day swings of at least 2 percent that occurred in 2008.
To recap a few of the things we learned about the economy last week, the positives included that consumer sentiment remained elevated, revolving credit rebounded, mortgage applications rose, productivity growth in the third quarter of 2018 was revised higher, corporate layoff announcements fell, small business hiring improved, initial jobless claims decreased, and the unemployment rate held near a half-century low. As for the negatives, the nation’s trade deficit climbed to a 10-year high, private-sector construction spending declined, nonfarm employment rose by less than expected, wage growth disappointed forecasts, underemployment increased, and gauges of activity in both the manufacturing and services sectors continued to send mixed signals. This week the pace of economic data slows down but there are still a few important reports on retail sales, small business, inflation, and the labor market scheduled to be released.
**A more detailed snapshot of the U.S. economy can be found here.**
What To Watch:
- JOLTS 10:00 AM ET
- MBA Mortgage Applications 7:00 AM ET
- CPI 8:30 AM ET
- Atlanta Fed Business Inflation Expectations 10:00 AM ET
- EIA Petroleum Status Report 10:30 AM ET
- 10-Yr Note Auction 1:00 PM ET
- Jobless Claims 8:30 AM ET
- Import and Export Prices 8:30 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 30-Yr Bond Auction 1:00 PM ET
- Retail Sales 8:30 AM ET
- Industrial Production 9:15 AM ET
- Business Inventories 10:00 AM ET
- Baker-Hughes Rig Count 1:00 PM ET
Sources: Econoday, FRBC, Pension Partners, FRBSL
Post author: Charles Couch