Resnick Advisors Weekly Update – March 26, 2018
March 26, 2018
Citing continued strengthening of the labor market and moderate rising of economic activity, the Federal Open Market Committee decided to increase the target range for the federal funds rate 25 basis points from 1.50% to 1.75%. The Committee raised the target range despite inflation that continues to run below the Fed’s target rate of 2.0%. Two more rate hikes remain likely during the remainder of 2018.
Sales of existing homes picked up the pace in February following two consecutive monthly declines. Existing home sales grew 3.0% for the month, and are now 1.1% above a year ago. The median existing home price expanded for the 72nd straight month in February, increasing to $241,700, which is up 5.9% from February 2017 ($228,200). Helping drive sales was an increase in existing home inventory, which rose 4.6% (still 8.1% lower than a year ago). There is a 3.4-month supply of unsold inventory at the current sales pace, compared to a 3.8-month supply in January. Despite surging prices and low inventories, the uptick in sales of existing homes is likely attributable to a healthy economy.
New home sales slipped in February, down 0.6% from their January pace. Nevertheless, sales are still 0.5% ahead of their February 2017 estimate. The median sales price of new houses sold in February 2018 was $326,800. The average sales price was $376,700. Inventory of new homes for sale represents a supply of about 5.9 months at the current sales rate.
The manufacturing sector bounced back in February as new orders for durable goods increased by 3.1% for the month, compared to January’s 3.5% drop. Excluding transportation, which led the increase (up 7.1%), new orders increased 1.2%. Shipments, inventories, and unfilled orders also increased in February. New orders are up 8.9% year-over-year, while core capital goods (excluding defense and transportation) are up an impressive 8.0% over last year.
In the week ended March 17, there were 229,000 initial claims for unemployment insurance, an increase of 3,000 from the previous week’s level. The advance insured unemployment rate remained at 1.3% for the week ended March 10. The advance number of those receiving unemployment insurance benefits during the week ended March 10 was 1,828,000, a decrease of 57,000 from the prior week’s level, which was revised up by 6,000. This is the lowest level for insured unemployment since December 29, 1973, when it was 1,805,000.
DJIA: 23,533.20, down 5.67%
Nasdaq: 6,992.67, down 6.54%
S&P 500: 2,588.26, down 5.95%
Russell 2000: 1,510.08, down 4.79%
Global Dow: 2,988.62, down 4.25%
Fed. Funds: 1.50%-1.75%, up 25 bps
10-year Treasuries: 2.81%, down 3 bps
Stocks suffered steep losses for the week against a remarkably turbulent geopolitical backdrop. The large-cap Standard & Poor’s 500 Index eclipsed its sharp drop in early February and recorded its worst weekly loss since the start of 2016. The technology-heavy Nasdaq Composite performed even worse, weighed down in part by a steep drop in Facebook shares following revelations about undisclosed use of customer data. Likewise, technology shares fared especially poorly in the S&P 500 Index, along with financials and health care stocks. Conversely, energy stocks managed to escape the week’s downdraft, thanks to a rally in oil prices to seven-week highs following reports of a drawdown in crude inventories. The declines took most of the indexes back into negative territory for the year to date.
Multiple factors appeared to weigh on sentiment during the week, but the prospect of escalating trade tensions was clearly chief among them. The week’s biggest declines occurred Thursday afternoon, following the Trump administration’s announcement that it was planning on imposing tariffs on $60 billion worth of imports from China, along with new restrictions on technology transfers and acquisitions of U.S. firms by Chinese competitors. On Friday, the Chinese Commerce Ministry referred to the tariff plans as setting a “vile precedent.” Additionally, Chinese officials declared that they would target $3 billion in U.S. goods with import duties of their own in response to previously announced U.S. steel and aluminum tariffs.
Traders observed that other unexpected developments at the White House also unnerved markets. Stocks wobbled earlier Thursday following news of the resignation of John Dowd, President Trump’s chief attorney in the Mueller probe. After the close of trading, news also came of the replacement of National Security Advisor H. R. McMaster with former U.N. Ambassador John Bolton, widely perceived as likely to take a harder line against North Korea and Iran. Finally, stocks wavered again on Friday morning, following a tweet from the president threatening a veto of a $1.3 trillion spending bill that passed through Congress on Thursday. A veto would have prompted a government shutdown at midnight Friday, but President Trump eventually signed the bill on Friday afternoon, warning that he would “never sign another bill like this again.”
The yield on the 10-year Treasury note moved back to multiyear highs on Wednesday but declined on Thursday, as investors sought perceived safe havens in response to trade worries. (Bond prices and yields move in opposite directions.) Municipal bond returns were flat for the week. While the primary driver of activity, new issuance, continued to be extremely light, cash flows into the sector forced investors to look for longer-term issues in the secondary market, leading to a flattening of the yield curve. In the investment-grade corporate bond market, investors seemed reluctant to deploy capital given expectations for a near-term increase in issuance due, in part, to borrowing related to mergers and acquisitions. Indeed, issuance had surpassed early estimates by mid-week before the primary market went quiet ahead of the Fed’s policy meeting. Credit spreads drifted wider across most market segments amid the equity sell-off. High yield primary market activity was mostly subdued before the Fed’s announcement. Energy credits received greater interest as oil prices climbed. In the second half of the week, risk-off sentiment amid equity market weakness weighed on the segment.
As trade friction increased, European stocks dipped to lows not seen since early 2017. Traders noted that investor sentiment remained fragile as tensions between U.S. and China heightened. While the U.S. temporarily exempted European Union nations from looming steel and aluminum tariffs, it apparently was not enough to quell concerns from investors about a potential trade war between the world’s two biggest economies. Stocks plummeted for three consecutive days at the end of week due to lackluster economic data as well as the announcement of U.S. import tariffs. The pan-European index STOXX 600, Germany’s export-heavy index DAX 30, the UK blue chip FTSE 100, and France’s CAC 40 all gave up between 1% and 4% or the week. Basic resource, technology, and bank stocks were some of the weakest segments.
Eurozone government bonds rallied across most markets this week, driven in part by subdued economic data. Preliminary purchasing managers’ index (PMI) figures for March showed businesses in the eurozone had reported the slowest pace of growth in over a year. The yield on 10-year German bunds had fallen to around 0.53% by Friday’s close, down for the week.
In the UK, government bonds sold off as market expectations of an interest rate hike in May increased, despite the Bank of England’s (BoE) decision to keep rates on hold at its March meeting. The central bank’s monetary policy committee voted 7–2 in favor of keeping the key interest rate at 0.5% at its meeting on Thursday. However, the BoE also stoked expectations of a future hike, commenting in its statement accompanying the decision that “given the prospect of excess demand over the forecast period, an ongoing tightening of monetary policy over the forecast period will be appropriate to return inflation sustainably to its target at a more conventional horizon.” The yield on 10-year gilts was around 1.45% at Friday’s close, up for the week.
Japanese stocks plunged in the holiday-shortened trading week (the Japanese market was closed on Wednesday for Vernal Equinox Day). The Nikkei 225 Stock Average declined 4.9%. All of the major Japanese market indexes are substantially in the red for the year to date. The Nikkei is off 9.4%, the broad-based TOPIX Index down 8.4%, and the TOPIX Small Index has declined 8.5%. The yen strengthened and closed Friday’s trading at ¥105.10 per U.S. dollar, which is about 7.0% stronger than ¥112.7/dollar at the end of 2017.
Most of the weekly loss occurred on Friday following and President Trump’s announcement of new China tariffs. The Trump administration also removed earlier steel and aluminum tariffs from many countries in Europe and South Korea but left them in place for Japan. The broad-based TOPIX Index fell more than 3.5% in the session — dipping to its lowest level in more than five months. The Japanese sectors that fell the furthest in Friday’s trading included technology, telecommunication services, industrials and business services, and materials.
China’s benchmark stock indexes slumped Friday and recorded their worst weekly performance in six weeks amid fears of an escalating trade war with the U.S. The Shanghai Composite Index and the blue chip CSI 300 Index shed 3.6% and 2.9%, respectively, with each benchmark notching its lowest close since early February. The steep declines prompted intervention by China’s government-backed investment funds, which habitually step in to prop up domestic stock markets on days of big losses. Mainland stock markets slumped after Beijing unveiled plans to impose tariffs on up to $3 billion of U.S. imports, a day after President Trump imposed tariffs on $60 billion of Chinese-made products and tighter restrictions on acquisitions and technology transfers.
Portions of the preceding information are reprinted with permission from Broadridge Investor Communication Solutions, Inc. Copyright 2018. Portions of the preceding information are shared from T. Rowe Price Weekly Market Wrap-Up.